you
As
filed with the Securities and Exchange Commission on August 5, 2010
Registration
No. 333-______
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-11
FOR
REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF
SECURITIES OF CERTAIN REAL ESTATE COMPANIES
AMERICAN
REALTY CAPITAL TRUST, INC.
(Exact
Name of Registrant as Specified in Its Governing Instruments)
106
York Road
Jenkintown,
Pennsylvania 19046
(215)
887-2189
(Address,
Including Zip Code and Telephone Number,
Including
Area Code, of Registrant’s Principal Executive Offices)
Nicholas
S. Schorsch
AMERICAN
REALTY CAPITAL TRUST, INC.
106
York Road
Jenkintown,
Pennsylvania 19046
(215)
887-2189
(Name and
Address, Including Zip Code and Telephone Number,
Including
Area Code, of Agent for Service)
With
a Copy to:
Peter
M. Fass, Esq.
Proskauer
Rose LLP
1585
Broadway
New
York, New York 10036-8299
(212)
969-3000
Approximate Date of Commencement of
Proposed Sale to Public: As soon as practicable after the
registration statement becomes effective.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering: o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering: o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check,
the following box: o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one)
Large
accelerated filer o
|
Accelerated
filer o
|
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|
Non-accelerated
filer x
(Do
not check if a smaller reporting company)
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Smaller
reporting company o
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CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
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|
Title
of Each Class of
Securities
to be Registered
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|
Amounts
to be
Registered
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|
Proposed
Offering
Price
Per Unit
|
|
Proposed
Aggregate
Offering
Price
|
|
Amount
of
Registration
Fee
|
Primary
Offering
|
Common
Stock, par value $0.01 per share
|
|
32,500,000
|
|
$10.00
|
|
$325,000,000.00
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|
$23,172.50
|
Distribution
Reinvestment Plan
|
Common
Stock, par value $0.01 per share
|
|
2,631,578
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|
$9.50
|
|
$25,000,000.00
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|
$1,782.50
|
Total
|
|
35,131,578
|
|
|
|
$350,000,000.00
|
|
$24,955.00
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The
registrant hereby amends this registration statement on such dates as may be
necessary to delay its effective date until the registrant shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until this registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. The
prospectus is not an offer to sell the securities and it is not soliciting
an offer to buy these securities in any state where the offer or sale is
not permitted.
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SUBJECT
TO COMPLETION, AUGUST
5, 2010
AMERICAN
REALTY CAPITAL
AMERICAN
REALTY CAPITAL TRUST, INC.
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|
Maximum
Offering of 32,500,000 Shares of Common Stock
American
Realty Capital Trust, Inc. is a Maryland corporation that qualifies as a real
estate investment trust for U.S. federal income tax purposes, or REIT. We
will invest primarily in freestanding, single-tenant retail properties net
leased to investment grade and other creditworthy tenants.
We
commenced our initial public offering of shares of our common stock on January
25, 2008, which we refer to as our initial offering. As of July 27, 2010,
we had raised gross offering proceeds of $328.7 million from 8,604 stockholders
pursuant to our initial offering, which will terminate no later than January 25,
2011, unless extended through no later than July 25, 2011. As of July 27,
2010, we owned 169 geographically diverse properties comprising approximately
2.9 million square feet of gross leasable area, located in 30
states.
In this
follow-on offering, we are offering up to 32,500,000 shares of our common
stock, $0.01 par value per share, in our primary offering for $10.00 per share,
with discounts available for certain categories of purchasers. We are also
offering up to 2,631,578 shares pursuant to our distribution reinvestment plan
at a purchase price of $9.50 per share. We reserve the right to reallocate the
shares of our common stock we are offering between the primary offering and the
distribution reinvestment plan.
See
“Risk Factors” for a description of some of the risks you should consider before
buying shares of our common stock. These risks include the
following:
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·
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As
of July 27, 2010 we have made 169 geographically diverse acquisitions but
have not identified specific properties to acquire with the net proceeds
we will receive from this follow-on offering. You will be unable to
evaluate the economic merit of our future investments before we make them
and there may be a substantial delay in receiving a return, if any, on
your investment.
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·
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There
are substantial conflicts among us and our sponsor, advisor, dealer
manager and property manager, such as the fact that our principal
executive officers own a majority interest in our advisor, our
dealer-manager and our property manager, and our advisor and other
affiliated entities may compete with us and acquire properties suitable to
our investment objectives.
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·
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No
public market currently exists, and one may never exist, for shares of our
common stock. If you are able to sell your shares, you would likely
have to sell them at a substantial
discount.
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·
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Distributions
payable to our stockholders may, without limitation, include distributions
from the proceeds of this offering or from borrowings in anticipation of
future cash flow, which may constitute a return of capital, reduce the
amount of capital we ultimately invest in properties and negatively impact
the value of your investment.
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·
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If
we do not remain qualified to be taxed as a REIT, it would reduce the
amount of income available for distribution and limit our ability to make
distributions to our stockholders.
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·
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You
may not own more than 9.8% in value of the aggregate of our outstanding
shares of stock and not more than 9.8% (in value or in number of shares,
whichever is more restrictive) of any class or series of shares of our
stock.
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·
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We
may incur substantial debt, which could hinder our ability to pay
distributions to our stockholders or could decrease the value of your
investment in the event that income on, or the value of, the property
securing the debt falls, but we will not incur debt to the extent it will
restrict our ability to qualify as a
REIT.
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·
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We
are dependent on our advisor to select investments and conduct our
operations. Adverse changes in the financial condition of our
advisor or our relationship with our advisor could adversely affect
us.
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·
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We
will pay substantial fees and expenses to our advisor, its affiliates and
participating broker-dealers, which payments increase the risk that you
will not earn a profit on your
investment.
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·
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This
is a “best efforts” offering and we might not sell all of the shares being
offered.
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These
are speculative securities and this investment involves a high degree of
risk. You should purchase these securities only if you can afford a
complete loss of your investment.
Neither
the Securities and Exchange Commission, the Attorney General of the State of New
York nor any other state securities regulator has approved or disapproved of our
common stock, determined if this prospectus is truthful or complete or passed on
or endorsed the merits of this offering. Any representation to the
contrary is a criminal offense.
The
use of projections in this offering is prohibited. Any representation to
the contrary, and any predictions, written or oral, as to the amount or
certainty of any future benefit or tax consequence that may flow from an
investment in this program is not permitted. All proceeds from this
offering are funds held in trust until subscriptions are accepted and funds are
released.
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Net Proceeds
(Before Expenses)
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Follow-On
Primary Offering
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Per
Share
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$ |
10.00 |
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$ |
0.70 |
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$ |
0.30 |
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$ |
9.00 |
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Total
Maximum
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$ |
350,000,000 |
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$ |
24,500,000 |
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$ |
10,500,000 |
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$ |
35,000,000 |
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The
dealer manager of this offering, Realty Capital Securities, LLC, is a member
firm of the Financial Industry Regulatory Authority (FINRA) is our affiliate and
will offer the shares on a best efforts basis. The minimum investment
amount generally is $1,000. See the “Plan of Distribution” section of this
prospectus for a description of compensation that may be received by our dealer
manger and other broker-dealers in this offering.
We
commenced our initial public offering of 150,000,000 shares of common stock on
January 25, 2008, which we refer to as our initial offering. We will offer
shares under the initial offering until January 25, 2011, unless such initial
offering is extended to a date no later than July 25, 2011. We will sell
shares under the follow-on offering until the earlier of the date on which all
shares under the follow-on offering have been sold or August 5, 2012, two years
from the date of this prospectus.
August 5,
2010
Suitability
Standards
An
investment in our common stock involves significant risk and is only suitable
for persons who have adequate financial means, desire a relatively long-term
investment and who will not need immediate liquidity from their
investment. Initially, we will not have a public market for our common
stock, and we cannot assure you that one will develop, which means that it may
be difficult for you to sell your shares. This investment is not suitable
for persons who require immediate liquidity or guaranteed income, or who seek a
short-term investment.
In
consideration of these factors, we have established suitability standards for
initial stockholders and subsequent purchasers of shares from our
stockholders. These suitability standards require that a purchaser of
shares have, excluding the value of a purchaser’s home, furnishings and
automobiles, either:
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·
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a
net worth of at least $250,000; or
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·
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a
gross annual income of at least $70,000 and a net worth of at least
$70,000.
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The
minimum purchase is 100 shares ($1,000), except in certain states as described
below. Purchases in amounts above the $1,000 minimum and all subsequent
purchases may be made in whole or fractional shares, again subject to the
limitations described below for certain states. You may not transfer fewer
shares than the minimum purchase requirement. In addition, you may not
transfer, fractionalize or subdivide your shares so as to retain less than the
number of shares required for the minimum purchase. In order to satisfy
the minimum purchase requirements for retirement plans, unless otherwise
prohibited by state law, a husband and wife may jointly contribute funds from
their separate IRAs, and jointly meet suitability standards, provided that each
such contribution is made in increments of $100.00 or ten (10) whole
shares. You should note that an investment in shares of our company will
not, in itself, create a retirement plan and that, in order to create a
retirement plan, you must comply with all applicable provisions of the Internal
Revenue Code of 1986, as amended (the “Code”)..
The
minimum purchase for Maine, New York, Tennessee and North Carolina residents is
250 shares ($2,500), except for IRAs which must purchase a minimum of 100 shares
($1,000). The minimum purchase for Minnesota residents is 250 shares
($2,500), except for IRAs and other qualified retirement plans which must
purchase a minimum of 200 shares ($2,000). Following an initial
subscription for at least the required minimum investment, any investor may make
additional purchases in increments of at least 100 shares ($1,000), except for
purchases made by residents of Maine and Minnesota, whose additional investments
must meet their state’s minimum investment amount, and purchases of shares
pursuant to the initial offering’s distribution reinvestment plan and automatic
purchase plan, which may be in lesser amounts.
Several
states have established suitability requirements that are more stringent than
the standards that we have established and described above. Shares will be
sold only to investors in these states who meet the special suitability
standards set forth below:
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·
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Kentucky
— Investors must have either (a) a net worth of $250,000 or (b) a gross
annual income of at least $70,000 and a net worth of at least $70,000,
with the amount invested in this offering not to exceed 10% of the
Kentucky investor’s liquid net
worth.
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·
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Massachusetts,
Ohio, Iowa, Pennsylvania and Oregon — Investors must have either (a) a
minimum net worth of at least $250,000 or (b) an annual gross income of at
least $70,000 and a net worth of at least $70,000. The investor’s
maximum investment in the issuer and its affiliates cannot exceed 10% of
the Massachusetts, Ohio, Iowa, Pennsylvania or Oregon resident’s net
worth.
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·
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Michigan
— Investors must have either (a) a minimum net worth of at least $250,000
or (b) an annual gross income of at least $70,000 and a net worth of at
least $70,000. The maximum investment in the issuer and its
affiliates cannot exceed 10% of the Michigan resident’s net
worth.
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·
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Tennessee
— In addition to the suitability requirements described above, investors’
maximum investment in our shares and our affiliates shall not exceed 10%
of the resident’s net worth.
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Kansas
— In addition to the suitability requirements described above, it is
recommended that investors should invest no more than 10% of their liquid
net worth in our shares and securities of other real estate investment
trusts. “Liquid net worth” is defined as that portion of net worth
(total assets minus total liabilities) that is comprised of cash, cash
equivalents and readily marketable
securities.
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·
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Missouri
— In addition to the suitability requirements described above, no more
than ten percent (10%) of any one (1) Missouri investor’s liquid net worth
shall be invested in the securities registered by us for this offering
with the Securities Division.
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·
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California
— In addition to the suitability requirements described above, investors’
maximum investment in our shares will be limited to 10% of the investor’s
net worth (exclusive of home, home furnishings and
automobile).
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·
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Alabama
and Mississippi — In addition to the suitability standards above, shares
will only be sold to Alabama and Mississippi residents that represent that
they have a liquid net worth of at least 10 times the amount of their
investment in this real estate investment program and other similar
programs.
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In all
states listed above, net worth is to be determined excluding the value of a
purchaser’s home, furnishings and automobiles.
Each
sponsor, participating broker-dealer, authorized representative or any other
person selling shares on our behalf is required to:
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·
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make
every reasonable effort to determine that the purchase of shares is a
suitable and appropriate investment for each investor based on information
provided by such investor to the broker-dealer, including such investor’s
age, investment objectives, income, net worth, financial situation and
other investments held by such investor;
and
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·
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maintain
records for at least six years of the information used to determine that
an investment in the shares is suitable and appropriate for each
investor.
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In making
this determination, your participating broker-dealer, authorized representative
or other person selling shares on our behalf will, based on a review of the
information provided by you in the subscription agreement (Appendix A), consider
whether you:
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meet
the minimum income and net worth standards established in your
state;
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can
reasonably benefit from an investment in our common stock based on your
overall investment objectives and portfolio
structure;
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are
able to bear the economic risk of the investment based on your overall
financial situation; and
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have
an apparent understanding of:
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·
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the
fundamental risks of an investment in our common
stock;
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·
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the
risk that you may lose your entire
investment;
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·
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the
lack of liquidity of our common
stock;
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·
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the
restrictions on transferability of our common
stock;
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the
background and qualifications of our advisor;
and
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·
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the
tax consequences of an investment in our common
stock.
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In the
case of sales to fiduciary accounts, the suitability standards must be met by
the fiduciary account, by the person who directly or indirectly supplied the
funds for the purchase of the shares or by the beneficiary of the account.
Given the long-term nature of an investment in our shares, our investment
objectives and the relative illiquidity of our shares, our suitability standards
are intended to help ensure that shares of our common stock are an appropriate
investment for those of you who become investors.
In order
to ensure adherence to the suitability standards above, requisite criteria must
be met, as set forth in the Subscription Agreement in the form attached hereto
as Appendix A. In addition, our advisor and dealer manager must make every
reasonable effort to determine that the purchase of our shares (including the
purchase of our shares through the automatic purchase plan) is a suitable and
appropriate investment for an investor. In making this determination, our
advisor and dealer manager will rely on relevant information provided by the
investor, including information as to the investor’s age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. Executed Subscription
Agreements will be maintained in our records for six years.
RESTRICTIONS
IMPOSED BY THE USA PATRIOT ACT AND RELATED ACTS
In
accordance with the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the
USA PATRIOT Act), the units offered hereby may not be offered, sold, transferred
or delivered, directly or indirectly, to any “Prohibited Partner,” which means
anyone who is:
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·
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a
“designated national,” “specially designated national,” “specially
designated terrorist,” “specially designated global terrorist,” “foreign
terrorist organization,” or “blocked person” within the definitions set
forth in the Foreign Assets Control Regulations of the U.S. Treasury
Department;
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·
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acting
on behalf of, or an entity owned or controlled by, any government against
whom the U.S. maintains economic sanctions or embargoes under the
Regulations of the U.S. Treasury
Department;
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·
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within
the scope of Executive Order 13224 — Blocking Property and Prohibiting
Transactions with Persons who Commit, Threaten to Commit, or Support
Terrorism, effective September 24,
2001;
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·
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subject
to additional restrictions imposed by the following statutes or
regulations and executive orders issued thereunder: the Trading with
the Enemy Act, the Iraq Sanctions Act, the National Emergencies Act, the
Antiterrorism and Effective Death Penalty Act of 1996, the International
Emergency Economic Powers Act, the United Nations Participation Act, the
International Security and Development Cooperation Act, the Nuclear
Proliferation Prevention Act of 1994, the Foreign Narcotics Kingpin
Designation Act, the Iran and Libya Sanctions Act of 1996, the Cuban
Democracy Act, the Cuban Liberty and Democratic Solidarity Act and the
Foreign Operations, Export Financing and Related Programs Appropriation
Act or any other law of similar import as to any non-U.S. country, as each
such act or law has been or may be amended, adjusted, modified or reviewed
from time to time; or
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·
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designated
or blocked, associated or involved in terrorism, or subject to
restrictions under laws, regulations, or executive orders as may apply in
the future similar to those set forth
above.
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AMERICAN
REALITY CAPITAL TRUST, INC.
Table of
Contents
|
Page
|
Suitability
Standards
|
i
|
RESTRICTIONS
IMPOSED BY THE USA PATRIOT ACT AND RELATED ACTS
|
ii
|
QUESTIONS
AND ANSWERS ABOUT THIS OFFERING
|
vii
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PROSPECTUS
SUMMARY
|
1
|
Status
of the Initial Offering
|
1
|
American
Realty Capital Trust, Inc.
|
1
|
REIT
Status
|
1
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Advisor
|
1
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Management
|
1
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Operating
Partnership
|
2
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Summary
Risk Factors
|
2
|
Description
of Investments
|
3
|
Estimated
Use of Proceeds of This Follow-On Offering
|
6
|
Investment
Objectives
|
6
|
Conflicts
of Interest
|
7
|
Prior
Offering
|
8
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Terms
of The Offering
|
8
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Compensation
to Advisor and its Affiliates
|
8
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Status
of Fees Paid and Deferred
|
11
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Distributions
|
12
|
Listing
or Liquidation
|
12
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Distribution
Reinvestment Plan
|
12
|
Share
Repurchase Program
|
12
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About
this Prospectus
|
14
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RISK
FACTORS
|
15
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Risks
Related to an Investment in American Realty Capital Trust,
Inc.
|
15
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Risks
Related to Conflicts of Interest
|
17
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Risks
Related to This Offering and Our Corporate Structure
|
20
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General
Risks Related to Investments in Real Estate
|
24
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Risks
Associated with Debt Financing
|
31
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U.S.
Federal Income Tax Risks
|
33
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
37
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ESTIMATED
USE OF PROCEEDS
|
38
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MANAGEMENT
|
40
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General
|
40
|
Committees
of the Board of Directors
|
41
|
Audit
Committee
|
41
|
Executive
Officers and Directors
|
41
|
Compensation
of Directors
|
44
|
Stock
Option Plan
|
45
|
Restricted
Share Plan
|
45
|
Compliance
with the American Jobs Creation Act
|
46
|
Limited
Liability and Indemnification of Directors, Officers, Employees and Other
Agents
|
46
|
The
Advisor
|
48
|
The
Advisory Agreement
|
48
|
Affiliated
Companies
|
50
|
Investment
Decisions
|
52
|
Certain
Relationships and Related Transactions
|
53
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MANAGEMENT
COMPENSATION
|
55
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STOCK
OWNERSHIP
|
61
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CONFLICTS
OF INTEREST
|
62
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Interests
in Other Real Estate Programs
|
62
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Other
Activities of American Realty Capital Advisors, LLC and Its
Affiliates
|
62
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Competition
in Acquiring, Leasing and Operating of Properties
|
63
|
Affiliated
Dealer Manager
|
63
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Affiliated
Property Manager
|
63
|
Lack
of Separate Representation
|
63
|
Joint
Ventures with Affiliates of American Realty Capital Advisors,
LLC
|
63
|
Receipt
of Fees and Other Compensation by American Realty Capital Advisors, LLC
and Its Affiliates
|
63
|
Certain
Conflict Resolution Procedures
|
64
|
INVESTMENT
OBJECTIVES AND POLICIES
|
66
|
General
|
66
|
American
Realty Capital’s Business Plan
|
66
|
Acquisition
and Investment Policies
|
67
|
Making
Loans and Investments in Mortgages
|
79
|
Acquisition
of Properties from Affiliates
|
80
|
Section
1031 Exchange Program
|
81
|
Disposition
Policies
|
83
|
Investment
Limitations
|
83
|
Change
in Investment Objectives and Limitations
|
84
|
Investment
Company Act Considerations
|
84
|
Real
Property Investments
|
86
|
Potential
Property Investments
|
112
|
Other
Policies
|
112
|
PLAN
OF OPERATION
|
113
|
General
|
113
|
Liquidity
and Capital Resources
|
113
|
Results
of Operations
|
114
|
Inflation
|
114
|
SELECTED
FINANCIAL DATA
|
115
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATIONS
|
117
|
Overview
|
117
|
Recent
Market Conditions
|
118
|
Application
of Critical Accounting Policies
|
118
|
Liquidity
and Capital Resources
|
124
|
Election
as a REIT
|
125
|
Inflation
|
125
|
Related-Party
Transactions and Agreements
|
125
|
Conflicts
of Interest
|
125
|
Impact
of Recent Accounting Pronouncements
|
125
|
Off
Balance Sheet Arrangements
|
125
|
PRIOR
PERFORMANCE SUMMARY
|
126
|
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
|
129
|
ERISA
CONSIDERATIONS
|
143
|
General
|
143
|
Minimum
and Other Distribution Requirements — Plan Liquidity
|
144
|
Annual
or More Frequent Valuation Requirement
|
144
|
Fiduciary
Obligations — Prohibited Transactions
|
144
|
Plan
Assets—Definition
|
145
|
Plan
Assets — Registered Investment Company Exception
|
145
|
Publicly
Offered Securities Exemption
|
145
|
Plan
Assets — Operating Company Exception
|
145
|
Plan
Assets — Not Significant Investment Exception
|
146
|
Consequences
of Holding Plan Assets
|
146
|
Prohibited
Transactions
|
146
|
Prohibited
Transactions — Consequences
|
147
|
Reporting
|
147
|
DESCRIPTION
OF SHARES
|
148
|
Common
Stock
|
148
|
Preferred
Stock
|
148
|
Dilution
of Our Shares
|
149
|
Meetings
and Special Voting Requirements
|
149
|
Restrictions
on Ownership and Transfer
|
150
|
Automatic
Purchase Plan
|
151
|
Distribution
Policy and Distributions
|
151
|
Stockholder
Liability
|
155
|
Business
Combinations
|
155
|
Control
Share Acquisitions
|
156
|
Subtitle
8
|
156
|
Advance
Notice of Director Nominations and New Business
|
157
|
Share
Repurchase Program
|
157
|
Restrictions
on Roll-up Transactions
|
158
|
SUMMARY
OF OFFERING DISTRIBUTION REINVESTMENT PLAN
|
159 |
OUR
OPERATING PARTNERSHIP AGREEMENT
|
160
|
General
|
160
|
Capital
Contributions
|
160
|
Operations
|
160
|
Exchange
Rights
|
161
|
Amendments
to the Partnership Agreement
|
162
|
Termination
of the Partnership
|
162
|
Transferability
of Interests
|
162
|
PLAN
OF DISTRIBUTION
|
163
|
The
Offering
|
163
|
Realty
Capital Securities, LLC
|
163
|
Compensation
We Will Pay for the Sale of Our Shares
|
163
|
Shares
Purchased by Affiliates
|
164
|
Volume
Discounts
|
165
|
Subscription
Process
|
166
|
Status
of the Initial Offering
|
166
|
HOW
TO SUBSCRIBE
|
167
|
SUPPLEMENTAL
SALES MATERIAL
|
167
|
LEGAL
MATTERS
|
168
|
EXPERTS
|
168
|
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
|
169
|
WHERE
YOU CAN FIND MORE INFORMATION
|
170
|
APPENDIX
A: SUBSCRIPTION AGREEMENT
|
1
|
APPENDIX
B: PRIOR PERFORMANCE TABLES
|
1
|
ARC
Growth Partnership, LP
|
B-12
|
QUESTIONS
AND ANSWERS ABOUT THIS OFFERING
Below we
have provided some of the more frequently asked questions and answers relating
to an offering of this type. Please see “Prospectus Summary” and the
remainder of this prospectus for more detailed information about this
offering.
A:
|
In
general, a real estate investment trust, or REIT, is a company
that:
|
|
·
|
makes
an election to be treated as a REIT for U.S. federal income tax
purposes;
|
|
·
|
pays
distributions to investors each year of at least 90% of its taxable income
(excluding net capital gain), determined without regard to the deduction
for dividends paid;
|
|
·
|
avoids
the “double taxation” treatment of income that generally results from
investments in a corporation because a REIT generally is not subject to
U.S. federal corporate income taxes and excise taxes on its net income,
provided certain tax requirements are satisfied; and combines the capital
of many investors to acquire, with the proceeds from our initial offering
and this follow-on offering, a large-scale diversified real estate
portfolio under professional
management.
|
Q:
|
How
do you differentiate yourself from your competitors who offer non-traded
public REIT shares or real estate limited partnership
units?
|
A:
|
We
focus on acquiring a diversified portfolio of freestanding, single-tenant
retail and commercial properties that are net leased to investment grade
and other creditworthy tenants. The net leases with our tenants
allow us to pass through all operating and capital expenses items directly
to our tenant. The tenant is billed directly for all expense items
and capital costs and the tenant pays such costs directly to the provider
without having to go through us. Multi-tenant retail and commercial
properties, unlike our net lease properties, are subject to much greater
volatility in operating results due to unexpected increases in operating
costs or unforeseen capital and repair expenses. Our leases allow us
to pass through these costs to the
tenant.
|
We intend
to build a portfolio where 50% or more of our distributions are from rents
guaranteed by investment grade tenants. We believe that in addition to
simply having investment grade tenants in your portfolio, the majority of the
properties must be tenanted by investment grade (S&P rated BBB- or better)
companies in order to maximize the investors’ risk-adjusted return. While
we intend to pay distributions equivalent to those of our competitors, we
believe that the risk-adjusted returns on our portfolio are superior to those of
our competitors due to the high concentration of investment grade tenants, the
duration of our leases, i.e., 15 years and greater, and the net lease structure
of these leases.
Additionally,
since we acquire long term leases with minimum, non-cancelable lease terms of
ten or more years, the majority of which will be fifteen years or greater, we
are less subject to vacancy risk and tenant turnover than our competitors who
invest in multi-tenant properties. This allows us to better withstand
periods of economic uncertainty versus properties with a number of short term
leases. Our individual investments also tend to be smaller because we buy
freestanding single-tenant properties versus multi-tenant properties such as
malls, shopping centers and office buildings. This allows us to achieve
much greater diversification by geography, tenant mix and property type.
By achieving such diversification, we are less likely to be negatively affected
by economic downturns in local markets.
Q:
|
Generally,
what are the terms of your leases?
|
A:
|
We
seek to acquire properties that have leases with investment grade and
other creditworthy tenants. We expect that our leases generally will
be triple-net leases, which means that the tenant is responsible for all
costs and expenses related to the use and operation of the property,
including, but not limited to, the cost of maintenance, repairs, property
taxes and insurance, utilities and all other operating and capital
costs. In certain of these leases, we will be responsible for the
repair and/or replacement of specific structural and load bearing
components of a property, such as the roof or structure of the
building. We expect that our leases generally will have terms of ten
or more years, oftentimes with multiple renewal options. We may,
however, enter into leases that have a shorter
term.
|
Q:
|
How
will you determine creditworthiness of prospective tenants and select
potential investments?
|
A:
|
We
determine creditworthiness pursuant to various methods, including
reviewing financial data and other information about the tenant. In
addition, we may use an industry credit rating service to determine the
creditworthiness of potential tenants and any personal guarantor or
corporate guarantor of each potential tenant. We will compare the
reports produced by these services to the relevant financial and other
data collected from these parties before consummating a lease
transaction. Such relevant data from potential tenants and
guarantors include income and cash flow statements and balance sheets for
current and prior periods, net worth or cash flow of guarantors, and
business plans and other data we deem
relevant.
|
Our
Advisor considers relevant real property and financial factors in selecting
properties, including condition and location of the property, its
income-producing capacity and the prospects for its long-term
appreciation. Acquisitions or originations of loans are evaluated for the
quality of income, and the quality of the borrower and the security for the loan
or the nature and possibility of the acquisition of the underlying real estate
asset. Investments in other real estate-related securities will adhere to
similar principles. In addition, we consider the impact of each investment
as it relates to our portfolio as a whole.
Q:
|
What
is the experience of your officers and directors both in real estate in
general and with net leased assets in
particular?
|
A:
|
Nicholas
S. Schorsch, our chairman and chief executive officer, founded and
formerly served as President, CEO and Vice-Chairman of American Financial
Realty Trust since its inception as a REIT in September 2002 until August
2006. American Financial Realty Trust is a publicly traded REIT
listed on the NYSE that invests exclusively in office, bank branches and
other operationally critical real estate assets that are net leased to
tenants in the financial service industry such as banks and insurance
companies. Through American Financial Resource Group and its
successor corporation, now American Financial Realty Trust, Mr. Schorsch
has executed in excess of 1,000 acquisitions, both in acquiring businesses
and real estate properties with transactional value of approximately $5
billion. In 2003, Mr. Schorsch received an Entrepreneur of the Year
award from Ernst & Young.
|
William
M. Kahane, our President, Chief Operating Officer and Treasurer, began his
career as a real estate lawyer practicing in the public and private sectors from
1974-1979. From 1981-1992 Mr. Kahane worked at Morgan Stanley & Co.,
specializing in real estate, becoming a Managing Director in 1989. In
1992, Mr. Kahane left Morgan Stanley to establish a real estate advisory and
asset sales business known as Milestone Partners which continues to operate
today. Mr. Kahane is currently a Managing Director of GF Capital
Management & Advisors LLC, a New York based merchant banking firm, where he
directs the company’s real estate investments. GF Capital offers
comprehensive wealth management services through its subsidiary TAG Associates
LLC, a leading multi-client family office and portfolio management services
company with approximately $5 billion of assets under management.
Peter M.
Budko, our Executive Vice President and Chief Investment Officer, founded and
formerly served as Managing Director and Group Head of the Structured Asset
Finance Group, a division of Wachovia Capital Markets, LLC from 1997-2006.
The Structured Asset Finance Group structures and invests in real estate that is
net leased to corporate tenants. While at Wachovia, Mr. Budko acquired
over $5 billion of net leased real estate assets. From 1987-1997, Mr.
Budko worked in the Corporate Real Estate Finance Group at NationsBank Capital
Market (predecessor to Bank of America Securities) becoming head of the group in
1990.
Brian S.
Block has served as Executive Vice President and Chief Financial Officer since
September 2007. He is also Executive Vice President and Chief Financial
Officer of American Realty Capital, LLC and American Realty Capital Properties,
LLC. Mr. Block is responsible for the accounting, finance and reporting
functions at ARC. He has extensive experience in SEC reporting
requirements as well as REIT tax compliance matters. Mr. Block has been
instrumental in developing ARC’s infrastructure and positioning the organization
for growth. Mr. Block began his career in public accounting at Ernst &
Young and Arthur Andersen from 1994 to 2000. Subsequently, Mr. Block was
the Chief Financial Officer of a venture capital-backed technology company for
several years prior to joining AFRT in 2002. While at AFRT, Mr. Block
served as Chief Accounting Officer from 2003 to 2007 and oversaw the financial,
administrative and reporting functions of the organization. He is a
certified public accountant and is a member of the AICPA and PICPA. Mr.
Block serves on the REIT Committee of the Investment Program
Association.
Edward M.
Weil, Jr., our Executive Vice President and Secretary, was formerly the Senior
Vice President of Sales and Leasing for American Financial Realty Trust, where
he was responsible for the disposition and leasing activity for a 33 million
square foot portfolio. Under the direction of Mr. Weil, his department was
the sole contributor in the increase of occupancy and portfolio revenue through
the sales of over 200 properties and the leasing of over 2.2 million square
feet, averaging 325,000 square feet of newly executed leases per
quarter.
Please
also see herein the section “Adverse Business Developments and
Conditions.”
Q:
|
What
is your environmental review
policy?
|
A:
|
We
generally will not purchase any property unless and until we also obtain
what is generally referred to as a “Phase I” environmental site assessment
and are generally satisfied with the environmental status of the
property. However, we may purchase a property without obtaining such
assessment if our advisor determines it is not warranted. A Phase I
environmental site assessment basically consists of a visual survey of the
building and the property in an attempt to identify areas of potential
environmental concerns. In addition, a visual survey of neighboring
properties is conducted to assess surface conditions or activities that
may have an adverse environmental impact on the property.
Furthermore, local governmental agency personnel are contacted who perform
a regulatory agency file search in an attempt to determine any known
environmental concerns in the immediate vicinity of the property. A
Phase I environmental site assessment does not generally include any
sampling or testing of soil, ground water or building materials from the
property, and may not reveal all environmental hazards on a
property. We expect that in most cases we will request, but will not
always obtain, a representation from the seller that, to its knowledge,
the property is not contaminated with hazardous materials.
Additionally, many of our leases contain clauses that require a tenant to
reimburse and indemnify us for any environmental contamination occurring
at the property.
|
Q:
|
Do
you expect to enter into joint
ventures?
|
A:
|
Possibly.
We may enter into joint ventures on property types that meet our overall
investment strategy and return criteria that would otherwise not be
available to us because the current owners may be reluctant to sell a 100%
interest in their property. We may also enter into a joint venture
with a third party who has control over a particular investment
opportunity but does not have sufficient equity capital to complete the
transaction. We may enter into joint ventures with our affiliates or
with third parties. Generally, we will only enter into a joint
venture in which we will control the decisions of the joint venture.
If we do enter into joint ventures, we may assume liabilities related to
the joint venture that exceed the percentage of our investment in the
joint venture.
|
Q:
|
Will
distributions be taxable as ordinary
income?
|
A:
|
Yes
and no. Generally, distributions that you receive (not designated as
capital gains dividends), including distributions that are reinvested
pursuant to our distribution reinvestment plan, will be taxed as ordinary
income to the extent the distribution is from current or accumulated
earnings and profits. However, distributions that we designate as
capital gains dividends will generally be taxable as long-term capital
gain to the extent they do not exceed our actual net capital gain for the
taxable year. We expect that some portion of your distributions may not be
subject to tax in the year received because depreciation expense reduces
taxable income but does not reduce cash available for distribution.
The portion of your distribution (not designated as a capital gain
dividend or, for taxable years beginning before January 1, 2011, qualified
dividend income) that is in excess of our current and accumulated earnings
and profits is considered a return of capital for U.S. federal income tax
purposes and will reduce the tax basis of your investment. This
defers a portion of your tax until your investment is sold or we are
liquidated, at which time you will be taxed at capital gains rates.
However, because each investor’s tax considerations are different, we
recommend that you consult with your tax advisor. You also should
review the section of this prospectus entitled “Material U.S. Federal
Income Tax Considerations.”
|
Q:
|
How
does a best efforts offering work?
|
A:
|
When
shares are offered to the public on a “best efforts” basis, the brokers
participating in the offering are only required to use their best efforts
to sell the shares and have no firm commitment or obligation to purchase
any of the shares. Therefore, we may not sell all of the shares that
we are offering.
|
Q.
|
What
kind of offering is this?
|
A:
|
This
is a follow-on offering to our initial offering. Through our dealer
manager, we are offering a maximum of $350,000,000 in shares in our
primary offering on a “best efforts” basis for $10.00 per
share.
|
Q.
|
What
is a follow-on offering?
|
A:
|
Our
initial offering commenced on January 25, 2008 and will terminate on or
before January 25, 2011, unless such initial offering is extended to a
date no later than July 25, 2011. We will continue to sell shares of
our common stock pursuant to this second public offering, or “follow-on”
offering, according to the terms, fees and conditions described in this
prospectus.
|
Q.
|
How
long will this offering last?
|
A:
|
This
is a continuous offering that will end no later than August 5, 2012 two
years from the date of the prospectus, unless extended. If we extend
beyond August 5, 2012, we will supplement the prospectus
accordingly. We may also terminate this offering at any
time.
|
Q:
|
What
will you do with the money raised in this offering before you invest the
proceeds in real estate?
|
A:
|
Until
we invest the net proceeds of this offering in real estate, we may use a
portion of the proceeds to fund distributions and we may invest in
short-term, highly liquid or other authorized investments, such as money
market mutual funds, certificates of deposit, commercial paper,
interest-bearing government securities and other short-term
investments. We may not be able to invest the proceeds in real
estate promptly and such short-term investments will not earn as high of a
return as we expect to earn on our real estate
investments.
|
A:
|
UPREIT
stands for “Umbrella Partnership Real Estate Investment Trust.” An UPREIT
is a REIT that holds substantially all of its properties through a
partnership in which the REIT holds an interest as a general partner
and/or a limited partner, approximately equal to the value of capital
raised by the REIT through sales of its capital stock. We use an
UPREIT structure because a sale of property directly to a REIT generally
is a taxable transaction to the selling property owner. In an UPREIT
structure, a seller of a property that desires to defer taxable gain on
the sale of its property may transfer the property to the UPREIT in
exchange for limited partnership units in the UPREIT and defer taxation of
gain until the seller later exchanges its UPREIT units on a one-for-one
basis for REIT shares. If the REIT shares are publicly traded, at
the time of the exchange of units for shares, the former property owner
will achieve liquidity for its investment. Using an UPREIT structure
may give us an advantage in acquiring desired properties from persons who
may not otherwise sell their properties because of certain unfavorable
U.S. federal income tax
consequences
|
A:
|
Generally,
you may buy shares pursuant to this prospectus provided that you have
either (a) a net worth of at least $70,000 and a gross annual income of at
least $70,000, or (b) a net worth of at least $250,000. For this
purpose, net worth does not include your home, home furnishings and
automobiles. Residents of certain states may have a different
standard. You should carefully read the more detailed description
under “Suitability Standards” immediately following the cover page of this
prospectus.
|
Q:
|
Who
should buy shares?
|
A:
|
An
investment in our shares may be appropriate for you if you meet the
minimum suitability standards mentioned above, seek to diversify your
personal portfolio with a finite-life real estate-based investment, which
among its benefits hedges against inflation and the volatility of the
stock market, seek to receive current income, seek to preserve capital,
wish to obtain the benefits of potential long-term capital appreciation,
and are able to hold your investment for a time period consistent with our
liquidity plans. Persons who require immediate liquidity or
guaranteed income, or who seek a short-term investment, are not
appropriate investors for us, as our shares will not meet those
needs.
|
Q:
|
May I make an investment
through my IRA, SEP or other tax-deferred
account?
|
A:
|
Yes.
You may make an investment through your individual retirement account
(“IRA”), a simplified employee pension (“SEP”) plan or other tax-deferred
account. In making these investment decisions, you should consider,
at a minimum, (a) whether the investment is in accordance with the
documents and instruments governing your IRA, plan or other account, (b)
whether the investment satisfies the fiduciary requirements associated
with your IRA, plan or other account, (c) whether the investment will
generate unrelated business taxable income (“UBTI”) to your IRA, plan or
other account, (d) whether there is sufficient liquidity for such
investment under your IRA, plan or other account, (e) the need to value
the assets of your IRA, plan or other account annually or more frequently,
and (f) whether the investment would constitute a prohibited transaction
under applicable law.
|
Q:
|
Is
there any minimum investment
required?
|
A:
|
Yes.
Generally, you must invest at least $1,000. Investors who already
own our shares can make additional purchases for less than the minimum
investment. You should carefully read the more detailed description
of the minimum investment requirements appearing under “Suitability
Standards” immediately following the cover page of this
prospectus.
|
Q:
|
What
type of reports on my investment will I
receive?
|
A:
|
We
will provide you with periodic updates on the performance of your
investment with us, including:
|
|
·
|
following
our commencement of distributions to stockholders, four quarterly or 12
monthly distribution reports;
|
|
·
|
three
quarterly financial reports only by written
request;
|
|
·
|
an
annual Form 1099; if applicable and
|
|
·
|
supplements
to the prospectus during the offering period, via mailings or website
access.
|
We will
provide this information to you via one or more of the following methods, in our
discretion and with your consent, if necessary:
|
·
|
U.S.
mail or other courier;
|
|
·
|
electronic
delivery; or
|
|
·
|
posting,
or providing a link, on our affiliated website, which is www.americanrealtycap.com.
|
Q:
|
When will I get my detailed tax
information?
|
A:
|
If
applicable your Form 1099 tax information will be placed in the mail by
January 31 of each year.
|
Q:
|
How
do I subscribe for shares?
|
A:
|
If
you choose to purchase shares in this offering and you are not already a
stockholder, you will need to complete and sign a subscription agreement,
like the one contained in this prospectus as Appendix A, for a specific
number of shares and pay for the shares at the time you
subscribe.
|
Q:
|
Who
is the transfer agent?
|
A:
|
The
name and address of our transfer agent
is:
|
DST
Systems, Inc.
430 W 7th
St
Kansas
City, MO 64105-1407
Phone
(866) 771-2088
Fax (877)
694-1113
To ensure
that any account changes are made promptly and accurately, all changes including
your address, ownership type and distribution mailing address should be directed
to the transfer agent.
Q:
|
Who
can help answer my questions?
|
A:
|
If
you have more questions about the offering or if you would like additional
copies of this prospectus, you should contact your registered
representative or contact:
|
Realty
Capital Securities, LLC
Three
Copley Place
Suite
3300
Boston,
MA 02116
1-877-373-3522
www.americanrealtycap.com
PROSPECTUS
SUMMARY
This
prospectus summary highlights material information contained elsewhere in this
prospectus. Because it is a summary, it may not contain all of the
information that is important to you. To understand this offering fully
you should read the entire prospectus carefully, including the “Risk Factors”
section and the financial statements, before making a decision to invest in our
common stock.
Status
of the Initial Offering
We
commenced our initial public offering of 150,000,000 shares of common stock on
January 25, 2008, which we refer to as our initial offering. As of
July 27, 2010, we had issued 33,045,410 shares of common stock. Total
gross proceeds from these issuances were $328.7 million. As of July 27,
2010, the aggregate value of all share issuances and subscriptions outstanding
was $330.2 million based on a per share value of $10.00 (or $9.50 per share for
shares issued under the DRIP). We will offer these shares until January
25, 2011, unless the initial offering is extended to no later than July 25,
2011, provided that the offering will be terminated if all of the shares are
sold before then. As of July 27, 2010, there were approximately
116,955,000 shares of our common stock outstanding, excluding shares available
under the initial offering’s distribution reinvestment plan.
In this
follow-on offering, we are offering up to 35,000,000 shares of our common stock,
$0.01 par value per share, in our primary offering for $10.00 per share, with
discounts available for certain categories of purchasers.
American
Realty Capital Trust, Inc.
American
Realty Capital Trust, Inc. is a Maryland corporation, incorporated on August 17,
2007 that qualifies as a REIT. We expect to use the net proceeds from this
offering to acquire and operate a portfolio of commercial real estate primarily
consisting of freestanding, single-tenant properties net leased to investment
grade and other creditworthy tenants located throughout the United States and
Commonwealth of Puerto Rico. Because we have invested in a limited number
of properties and have not yet identified any specific additional properties to
purchase, other than as described in the “Investment Objectives and Policies”
section herein, we may be considered to be a blind pool.
Our
corporate offices are located at 106 York Road, Jenkintown, PA 19046. Our
telephone number is 215-887-2189. Our fax number is 215-887-2585, and the
e-mail address of our investor relations department is [email protected].
Our
executive offices are located at 405 Park Avenue, New York, New York
10022. Our telephone number is 212-415-6500 and our fax number is
212-421-5799.
Our
regional sales offices are located at Three Copley Place, Suite 3300, Boston, MA
02116. Our telephone number is 877-373-2522 and our fax number is
857-350-9597.
Additional
information about us and our affiliates may be obtained at www.americanrealtycap.com,
but the contents of that site are not incorporated by reference in or
otherwise a part of this prospectus.
REIT
Status
If we
remain qualified as a REIT, we generally will not be subject to U.S. federal
income tax on our net taxable income that we distribute currently to our
stockholders. To maintain our REIT qualification under the Code, we must
meet a number of organizational and operational requirements, including a
requirement that we annually distribute at least 90% of our REIT taxable income
(which does not equal net income, as calculated in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) to our
stockholders, determined without regard to the deduction for dividends paid and
excluding any net capital gain. If we fail to remain qualified for
taxation as a REIT in any subsequent year and do not qualify for certain
statutory relief provisions, our income for that year will be taxed at regular
corporate rates, and we may be precluded from qualifying for treatment as a REIT
for the four-year period following our failure to qualify as a REIT. Even
if we qualify as a REIT for U.S. federal income tax purposes, we may still be
subject to some federal, state and local taxes on our income and property and to
U.S. federal income taxes and excise taxes on our undistributed income. See
“Material U.S. Federal Income Tax Considerations.”
Advisor
American
Realty Capital Advisors, LLC, a Delaware limited liability company, is our
advisor and is responsible for managing our affairs on a day-to-day basis and
for identifying and making acquisitions on our behalf.
Management
We
operate under the direction of our board of directors, the members of which are
accountable to us and our stockholders as fiduciaries. Currently, we have
five directors, Nicholas S. Schorsch, William M. Kahane, Leslie D. Michelson,
William G. Stanley and Robert H. Burns. Each of the latter three is
independent of American Realty Capital Advisors, LLC. Each of our
executive officers and two of our directors are affiliated with American Realty
Capital Advisors, LLC. Our charter, which requires that a majority of our
directors be independent of us, our sponsor, American Realty Capital Advisors,
LLC, or any of our or their affiliates, provides that our independent directors
will be responsible for reviewing the performance of American Realty Capital
Advisors, LLC and must approve other matters set forth in our charter. See
the “Conflicts of Interest — Certain Conflict Resolution Procedures” section of
this prospectus. Our directors will be elected annually by the
stockholders.
Operating
Partnership
We expect
to own substantially all of our real estate properties through American Realty
Capital Operating Partnership, L.P., our operating partnership. We may,
however, own properties directly, through subsidiaries of American Realty
Capital Operating Partnership, L.P. or through other entities. We are the
sole general partner of American Realty Capital Operating Partnership, L.P. and
American Realty Capital Advisors, LLC is the initial limited partner of American
Realty Capital Operating Partnership, L.P. Our ownership of properties in
American Realty Capital Operating Partnership, L.P. is referred to as an
“UPREIT.” This UPREIT structure may enable sellers of properties to transfer
their properties to American Realty Capital Operating Partnership, L.P. in
exchange for limited partnership units of American Realty Capital Operating
Partnership, L.P. and defer potential gain recognition for U.S. federal income
tax purposes with respect to such transfers of properties. The holders of
units in American Realty Capital Operating Partnership, L.P. may have their
units redeemed for cash or, at our option, shares of our common stock. At
present, we have no plans to acquire any specific properties in exchange for
units of American Realty Capital Operating Partnership, L.P.
Summary
Risk Factors
Following
are some of the risks relating to your investment:
|
·
|
Our
advisor and its affiliates will face conflicts of interest, including
significant conflicts among us and our advisor, since (a) our principal
executive officers own a majority interest in our advisor, our dealer
manager and our property manager, (b) our advisor and other affiliated
entities may compete with us and acquire properties suitable to our
investment objectives, and (c) our advisor’s compensation arrangements
with us and other American Realty Capital-sponsored programs may provide
incentives that are not aligned with the interests of our
stockholders.
|
|
·
|
This
may be considered a blind pool offering since we own a limited number of
properties and, other than as described in the “Investment Objectives and
Policies” section herein, we have not identified any specific additional
properties to acquire with the proceeds of this offering. As a
result, you will be unable to evaluate the economic merit of all of our
future investments prior to our making them and there may be a substantial
delay in receiving a return, if any, on your
investment.
|
|
·
|
Our
charter generally prohibits you from acquiring or owning, directly or
indirectly, more than 9.8% in value of the aggregate of our outstanding
shares of stock and not more than 9.8% (in value or in number of shares,
whichever is more restrictive) of any class or series of shares of our
stock and contains additional restrictions on the ownership and transfer
of our shares. Therefore, your ability to control the direction of
our company will be limited.
|
|
·
|
No
public market currently exists for shares of our common stock and one may
never exist. If you are able to sell your shares, you would likely
have to sell them at a substantial discount from their public offering
price.
|
|
·
|
This
is a best efforts offering and we might not sell all of the shares being
offered. If we raise substantially less than the maximum follow-on
offering, we may not be able to invest in a diverse portfolio of
properties, and the value of your investment may vary more widely with the
performance of specific properties. There is a greater risk that you
will lose money in your investment if we cannot diversify our portfolio of
investments by geographic location, tenant mix and property
type.
|
|
·
|
We
may incur substantial debt, which could hinder our ability to pay
distributions to our stockholders or could decrease the value of your
investment in the event that income on, or the value of, the property
securing the debt falls, but we will not incur debt to the extent it will
restrict our ability to qualify as a
REIT.
|
|
·
|
Until
the proceeds from this offering are invested and generating operating cash
flow sufficient to make distributions to our stockholders, we may pay all
or a substantial portion of our distributions from the proceeds of this
offering or from borrowings in anticipation of future cash flow, which may
constitute a return of your capital, reduce the amount of capital we
ultimately invest in properties, and negatively impact the value of your
investment.
|
|
·
|
If
we fail to continue to qualify as a REIT for U.S. federal income tax
purposes, our operations and ability to make distributions to our
stockholders would be adversely
affected.
|
|
·
|
We
are dependent on our advisor to select investments and conduct our
operations. Adverse changes in the financial condition of our
advisor or our relationship with our advisor could adversely affect
us.
|
|
·
|
We
will pay substantial fees and expenses to our advisor, its affiliates and
participating broker-dealers, which payments increase the risk that you
will not earn a profit on your
investment.
|
|
·
|
Our
board of directors has the authority to designate and issue one or more
classes or series of preferred stock without stockholder approval, with
rights and preferences senior to the rights of holders of common stock,
including rights to payment of distributions. If we issue any shares
of preferred stock, the amount of funds available for the payment of
distributions on the common stock could be reduced or
eliminated.
|
|
·
|
We
may be deemed to be an investment company under the Investment Company Act
of 1940 (the “Investment Company Act”) and thus subject to regulation
under the Investment Company Act.
|
Before
you invest in us, you should carefully read and consider the more detailed “Risk
Factors” section of this prospectus.
Description
of Investments
We employ
a focused investment strategy: acquire single-tenant, freestanding
properties, net-leased on a long-term basis to investment-grade and other
creditworthy tenants. From a geographical standpoint, our target
properties: (i) enjoy a strong location on “Main Street, USA,” e.g.,
pharmacies, banks, restaurants, gas/convenience stores; or (ii) are situated
along high traffic transit corridors at locations carefully selected by the
corporate tenant to support operationally essential corporate
distribution/warehouse and logistical facilities.
We
believe that American corporations, seeking to reduce the costs of distributing
their goods and services, are re-evaluating supply chain management and
distribution/warehouse capabilities. We believe that this has led to an
increased need for well-located real estate from which corporations may
cost-efficiently aggregate from suppliers and deploy to their regional retail
stores. We consider these two operationally essential categories as
complementary to our overall portfolio.
American
Realty Capital Trust seeks to build a diversified portfolio comprised primarily
of freestanding single-tenant bank branch, convenience store, retail, office and
industrial properties that are double-net and triple-net leased to investment
grade (S&P BBB- or better) and other creditworthy tenants. Triple-net
(NNN) leases typically require the tenant to pay substantially all of the costs
associated with operating and maintaining the property such as maintenance,
insurance, taxes, structural repairs and all other operating and capital
expenses. Double-net (NN) leases typically provide that the landlord is
responsible for maintaining the roof and structure, or other structural aspects
of the property, while the tenant is responsible for all remaining expenses
associated with the property. We seek to build a portfolio where at least
50% of the portfolio will be comprised of properties leased to investment grade
tenants. While most of our investment will be directly in such properties,
we may also invest in entities that own or invest in such properties. We
shall strive to assemble a portfolio of real estate that is diversified by
industry, geography, tenants, credits, and use. We do not anticipate any
single tenant or geographic concentration to comprise more than 10% of our
portfolio. We anticipate that our portfolio will consist primarily of
freestanding, single-tenant properties net leased for use as bank branches,
convenience stores, retail, office and industrial establishments. Although
we expect our portfolio will consist primarily of freestanding, single-tenant
properties, we will not forgo opportunities to invest in other types of real
estate investments that meet our overall investment objectives.
Additionally, we expect to further diversify our portfolio by making first
mortgage, bridge or mezzanine loans on single-tenant net-leased
properties. We will acquire or invest in properties and loans located only
in the United States and the Commonwealth of Puerto Rico.
Our
advisor, American Realty Capital Advisors, LLC, will make recommendations to our
board of directors for our investments. All acquisitions of commercial
properties will be evaluated for tenant creditworthiness and the reliability and
stability of their future income and capital appreciation potential. We
will consider the risk profile, credit quality and reputation of potential
tenants and the impact of each particular acquisition as it relates to the
portfolio as a whole. Our board of directors will exercise its fiduciary
duties to our stockholders in determining to approve or reject each of these
investment recommendations. See the section of this prospectus captioned
“Investment Objectives and Policies — Real Property Investments” for a more
detailed descriptions. As we acquire properties, we will supplement this
prospectus to describe material changes to our portfolio.
We
operate under the direction of our board of directors, the members of which are
accountable to us and our stockholders as fiduciaries. The board is
responsible for the overall management and control of our affairs. The
board has retained American Realty Capital Advisors, LLC to manage our
day-to-day affairs and the acquisition and disposition of our investments,
subject to the board’s supervision. As described in greater detail under
“Our Advisor,” below, our advisor will be responsible for making investment
decisions where the purchase price of a particular property is less than
$15,000,000 and the investment does not exceed stated leverage
limitations. Where such leverage limitations are exceeded, or where the
purchase price is equal to or greater than $15,000,000, investment decisions
will be made by our board of directors.
Because,
other than as described in the “Investment Objectives and Policies” section
herein, we have not yet identified any specific properties to purchase, we are
considered to be a blind pool. As we acquire properties, we will
supplement this prospectus to describe material changes to our
portfolio.
Real
Estate Investments Summary
The REIT
has acquired the following real estate investments through July 27,
2010:
|
·
|
Distribution and Warehouse
Facilities
|
|
·
|
a
FedEx Cross-Dock facility in Snowshoe, PA; a FedEx Freight Facility in
Houston, TX; and a FedEx Freight West, Inc. distribution facility in West
Sacramento, CA;
|
|
·
|
a
leasehold interest in a build-to-suit Home Depot Distribution Facility in
Topeka, KS;
|
|
·
|
2
Fresenius Medical Care Distribution Facilities located in Apple Valley, CA
and Shasta Lake, CA, respectively;
|
|
·
|
1
build-to-suit warehouse facility for Reckitt Benckiser located in Tooele,
UT, near Salt Lake City;
|
|
·
|
15
First Niagara (formerly Harleysville National Bank and Trust Company) bank
branch properties in various Pennsylvania
locations;
|
|
·
|
18
Rockland Trust Company bank branch properties in various Massachusetts
locations;
|
|
·
|
52
PNC Bank (including 2 formerly National City Bank) branches in Florida,
Pennsylvania, New Jersey and Ohio;
|
|
·
|
6
Rite Aid properties in various locations in Pennsylvania and
Ohio;
|
|
·
|
3
Walgreens locations located in Sealy, TX, Byram MS and LeRoy,
NY;
|
|
·
|
25
newly constructed retail stores from CVS Caremark located in 16 states —
Illinois, South Carolina, Texas, Georgia, Michigan, New York, Arizona,
North Carolina, California, Alabama, Florida, Indiana, Maine, Minnesota,
Missouri, and Nevada;
|
|
·
|
6
recently constructed Bridgestone retail stores in various locations in
Oklahoma and Florida;
|
|
·
|
4
Advanced Auto locations located in Michigan, Alabama and
Mississippi;
|
|
·
|
12
recently constructed Bridgestone Firestone auto-centers located in
Albuquerque, NM, Rockwell, TX, Weatherford, TX, League City, TX, Crowley,
TX, Allen, TX, Pearland, TX, Austin, TX, Grand Junction, CO, Benton, AR,
Wichita, KS and Baton Rouge, LA;
|
|
·
|
11
restaurants from Jack In the Box, Inc. located in Desloge, MO; The Dalles,
OR; Vancouver, WA, Corpus Christi, TX Houston, TX, South Houston,
TX; two properties in Victoria, TX; Beaumont, TX Ferris, TX and
Forney, TX.
|
|
·
|
3
built-to suit, free-standing restaurant for International House of
Pancakes located in Hilton Head, SC, Buford, GA and Cincinnati,
OH;
|
|
·
|
4
build-to-suit properties from Jared the Galleria of Jewelry located in
Amherst, NY, Lake Grove, NY and Watchung, NJ and Plymouth, Massachusetts;
and
|
|
·
|
1
Super Stop & Shop supermarket located in Nanuet,
NY.
|
|
·
|
1 build to suit free standing
retail property for Tractor Supply located in DuBois,
PA
|
|
·
|
1 build to suit free standing
retail property for Dollar General located in Jacksonville,
FL
|
The amount of the Year 1 yield based
upon the contract purchase price of the acquired properties as compared to the
Year 1 total rent is approximately 8.38% which excludes contractual rent
increases occurring in future years. The amounts in the following table
are as of March 31, 2010 (dollars in thousands)
Selected
Financial Data
The
selected financial data presented below has been derived from our consolidated
financial statements as of the periods indicated:
Balance sheet data (amounts in
thousands)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Total
real estate investments, at cost
|
|
$ |
419,994 |
|
|
$ |
338,556 |
|
|
$ |
164,770 |
|
|
$ |
— |
|
Total
assets
|
|
|
417,239 |
|
|
|
339,277 |
|
|
|
164,942 |
|
|
|
938 |
|
Mortgage
notes payable
|
|
|
225,118 |
|
|
|
183,811 |
|
|
|
112,742 |
|
|
|
— |
|
Total
short-term equity
|
|
|
0 |
|
|
|
15,878 |
|
|
|
30,926 |
|
|
|
— |
|
Other
notes payable
|
|
|
13,000 |
|
|
|
13,000 |
|
|
|
1,090 |
|
|
|
— |
|
Intangible
lease obligation, net
|
|
|
9,006 |
|
|
|
9,085 |
|
|
|
9,400 |
|
|
|
— |
|
Total
liabilities
|
|
|
254,736 |
|
|
|
228,721 |
|
|
|
163,183 |
|
|
|
738 |
|
Total
stockholders’ equity
|
|
|
162,503 |
|
|
|
110,556 |
|
|
|
1,759 |
|
|
|
200 |
|
Operating data (amounts in
thousands except per share data)
|
|
Three
Months
Ended
March
31, 2010
|
|
|
Year
Ended
December
31,
2009
|
|
|
Year
Ended
December
31,
2008
|
|
|
For
the Period
from
August 17,
2007 (date of
inception)
to
December
31,
2007
|
|
Total
revenue
|
|
$ |
7,428 |
|
|
$ |
14,964 |
|
|
$ |
5,546 |
|
|
$ |
— |
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
management fees to affiliate
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
Asset
management fees to affiliate
|
|
|
— |
|
|
|
145 |
|
|
|
— |
|
|
|
— |
|
Acquisition
and transaction related costs
|
|
|
341 |
|
|
|
506 |
|
|
|
— |
|
|
|
— |
|
General
and administrative
|
|
|
224 |
|
|
|
507 |
|
|
|
380 |
|
|
|
1 |
|
Depreciation
and amortization
|
|
|
3,785 |
|
|
|
8,315 |
|
|
|
3,056 |
|
|
|
— |
|
Total
operating expenses
|
|
|
4,350 |
|
|
|
9,473 |
|
|
|
3,440 |
|
|
|
1 |
|
Operating
income (loss)
|
|
|
3,078 |
|
|
|
5,491 |
|
|
|
2,106 |
|
|
|
(1
|
)
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,673
|
) |
|
|
(10,353
|
)
|
|
|
(4,774
|
)
|
|
|
— |
|
Interest
income
|
|
|
11 |
|
|
|
52 |
|
|
|
3 |
|
|
|
— |
|
Gains
on sales to noncontrolling interest holders, net
|
|
|
335 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gains
(losses) on derivative instruments
|
|
|
(152
|
) |
|
|
495 |
|
|
|
(1,618
|
)
|
|
|
— |
|
Total
other expenses
|
|
|
3,479 |
|
|
|
(9,805
|
)
|
|
|
(6,389
|
)
|
|
|
— |
|
Net
loss
|
|
$ |
(401 |
) |
|
$ |
(4,315 |
) |
|
$ |
(4,283 |
) |
|
$ |
(1 |
) |
Other
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified
funds from
operations (1)
(2)
|
|
$ |
3,314 |
|
|
$ |
3,460 |
|
|
$ |
477 |
|
|
$ |
— |
|
Cash
flows provided by (used in) operations
|
|
|
2,060 |
|
|
|
(2,526
|
)
|
|
|
4,013 |
|
|
|
(200
|
)
|
Cash
flows used in investing activities
|
|
|
(81,438
|
) |
|
|
(173,786
|
)
|
|
|
(97,456
|
)
|
|
|
— |
|
Cash
flows provided by financing activities
|
|
|
77,146 |
|
|
|
180,435 |
|
|
|
94,330 |
|
|
|
200 |
|
Per
share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share – basic and diluted
|
|
$ |
(0.02 |
) |
|
$ |
(0.74 |
) |
|
$ |
(6.02 |
) |
|
$ |
— |
|
Distributions
declared
|
|
$ |
.70 |
|
|
$ |
.67 |
|
|
$ |
.65 |
|
|
$ |
— |
|
Weighted-average
number of common shares outstanding, basic and diluted
|
|
|
17,845,489 |
|
|
|
5,768,761 |
|
|
|
711,524 |
|
|
|
— |
|
(1)
|
We
consider funds from operations (“FFO”) and modified funds from operations
(“MFFO”) a useful indicator of the performance of a REIT. Because FFO
calculations exclude such factors as depreciation and amortization of real
estate assets and gains or losses from sales of operating real estate
assets (which can vary among owners of identical assets in similar
conditions based on historical cost accounting and useful-life estimates),
they facilitate comparisons of operating performance between periods and
between other REITs in our peer group. Accounting for real estate assets
in accordance with GAAP implicitly assumes that the value of real estate
assets diminishes predictability over time. Since real estate values have
historically risen or fallen with market conditions, many industry
investors and analysts have considered the presentation of operating
results for real estate companies that use historical cost accounting to
be insufficient by themselves. As a result, we believe that the use of FFO
and MFFO, together with the required GAAP presentations, provide a more
complete understanding of our performance relative to our peers and a more
informed and appropriate basis on which to make decisions involving
operating, financing, and investing activities. Other REITs may not define
FFO and MFFO in accordance with the current National Association of Real
Estate Investment Trust’s (“NAREIT”) definition (as we do) or may
interpret the current NAREIT definition differently than we do.
Consequently, our presentation of FFO and MFFO may not be comparable to
other similarly titled measures presented by other
REITs.
|
(2)
|
The
FFO and MFFO measurement is applicable for the nine months ended December
31, 2008.
|
Estimated
Use of Proceeds of This Follow-On Offering
The
following table sets forth our best estimates of how we intend to use the
proceeds raised in this follow-on offering, assuming we sell the maximum number
of shares pursuant to the initial offering as well as this follow-on
offering. Depending primarily on the number of shares we sell in this
follow-on offering, we estimate for each share sold in this follow-on offering
approximately $8.71, as in the initial offering, will be available for the
purchase of real estate. We will use the remainder of the offering
proceeds to pay the costs of the offering, including selling commissions and the
dealer manager fee, and to pay a fee to our advisor for its services in
connection with the selection and acquisition of properties. The table
below sets forth our estimated use of proceeds from this offering:
|
|
Maximum Initial
Offering
(Not Including
Distribution
Reinvestment Plan)
|
|
|
Maximum Follow- On Offering1
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Offering Proceeds
|
|
$ |
1,500,000,000 |
|
|
$ |
325,000,000 |
|
|
|
100 |
% |
Less
Public Offering Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Commissions and Dealer Manager Fee
|
|
|
150,000,000 |
|
|
|
32,500,000 |
|
|
|
10.0 |
% |
Organization
and Offering Expenses
|
|
|
22,500,000 |
|
|
|
4,875,000 |
|
|
|
1.5 |
% |
Amount
Available for Investment
|
|
|
1,327,500,000 |
|
|
|
287,625,000 |
|
|
|
88.5 |
% |
Acquisition
and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
and Advisory Fees
|
|
|
13,275,000 |
|
|
|
2,545,481 |
|
|
|
0.885 |
% |
Acquisition
Expenses
|
|
|
6,000,000 |
|
|
|
1,150,500 |
|
|
|
0.4 |
% |
Initial
Working Capital Reserve
|
|
|
1,500,000 |
|
|
|
325,000 |
|
|
|
0.1 |
% |
Amount
Invested in Properties
|
|
$ |
1,306,725,000 |
|
|
$ |
283,604,019 |
|
|
|
87.115 |
% |
(1) The
total amount raised between the initial and follow-on offering will not exceed
$1.5 billion, excluding any funds raised by the distribution reinvestment
plan.
Investment
Objectives
Our
primary investment objectives are:
|
·
|
to
provide current income for you through the payment of cash distributions;
and
|
|
·
|
to
preserve, protect and return your invested
capital.
|
We also
seek capital gain from our investments. Our core investment strategy for
achieving these objectives is to acquire, own and manage a portfolio of
freestanding commercial properties that are leased to a diversified group of
creditworthy companies on a single-tenant, net lease basis. Net leases
generally require the tenant to pay substantially all of the costs associated
with operating and maintaining the property such as maintenance, insurance,
taxes, structural repairs and all other operating and capital expenses (referred
to as “triple-net leases”). See the “Investment Objectives and Policies”
section of this prospectus for a more complete description of our investment
policies and investment restrictions.
Conflicts
of Interest
American
Realty Capital Advisors, LLC, as our advisor, will experience conflicts of
interest in connection with the management of our business affairs, including
the following:
|
·
|
The
management personnel of American Realty Capital Advisors, LLC, each of
whom may in the future make investment decisions for other American Realty
Capital-sponsored programs and direct investments, must determine which
investment opportunities to recommend to us or another American Realty
Capital-sponsored program or joint venture, and must determine how to
allocate resources among us and any other future American Realty
Capital-sponsored programs;
|
|
·
|
American
Realty Capital Advisors, LLC may structure the terms of joint ventures
between us and other American Realty Capital-sponsored
programs;
|
|
·
|
American
Realty Capital Advisors, LLC and its affiliates will have to allocate
their time between us and other real estate programs and activities in
which they may be involved in the future;
and
|
|
·
|
American
Realty Capital Advisors, LLC and its affiliates will receive fees in
connection with transactions involving the purchase, financing, management
and sale of our properties, and, because our advisor does not maintain a
significant equity interest in us and is entitled to receive substantial
minimum compensation regardless of performance, our advisor’s interests
are not wholly aligned with those of our
stockholders.
|
Our
officers and two of our directors also will face these conflicts because of
their affiliation with American Realty Capital Advisors, LLC. These
conflicts of interest could result in decisions that are not in our best
interests. See the “Conflicts of Interest” section of this prospectus for
a detailed discussion of the various conflicts of interest relating to your
investment, as well as the procedures that we have established to mitigate a
number of these potential conflicts.
The
following chart shows the ownership structure of the various American Realty
Capital entities that are affiliated with American Realty Capital Advisors,
LLC.
_______________
(1)
|
The
investors in this offering will own registered shares of common stock in
American Realty Capital Trust, Inc.
|
(2)
|
The
Individuals are our Sponsors, Nicholas S. Schorsch, William M. Kahane,
Peter M. Budko, Brian S. Block, and Edward M. Weil, Jr., whose ownership
in the affiliates is represented by direct and indirect
interests.
|
(3)
|
American
Realty Capital II, LLC currently owns 20,000 shares of our common
stock.
|
(4)
|
American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into a Dealer Manager Agreement with Realty
Capital Securities, LLC, which will serve as our dealer
manager.
|
(5)
|
American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into an Advisory Agreement with American
Realty Capital Advisors, LLC, which will serve as our
advisor.
|
(6)
|
American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into a Property Management Agreement with
American Realty Capital Properties, LLC, which serves as our property
manager.
|
(7)
|
American
Realty Capital Operating Partnership, L.P. owns the properties indirectly
through respective special purpose
entities.
|
Prior
Offering
For a
summary of the prior offerings of our Sponsors see the section of this
prospectus captioned “Prior Offering Summary.”
Terms
of The Offering
We
commenced our initial public offering of shares of our common stock on
January 25, 2008, which we refer to as our initial offering. As of
July 27, 2010, we had raised gross offering proceeds of $328.7 million from
8,604 stockholders pursuant to our initial offering, which will terminate no
later than January 25, 2011, unless the initial offering is extended to no
later than July 25, 2011. As of July 27, 2010, we owned 169 geographically
diverse properties comprising approximately 2.9 million square feet of gross
leasable area, located in 30 states.
In this
follow-on offering ,we are offering up to 32,500,000 shares of our common
stock, $0.01 par value per share. for $10.00 per share, with discounts available
for certain categories of purchasers. We are also offering up to 2,631,578
shares pursuant to our distribution reinvestment plan at a purchase price of
$9.50 per share. We will sell shares under the follow-on offering until the
earlier of the date on which all shares under the follow-on offering have been
sold or August 5, 2012, two years from the date of this prospectus. We reserve
the right to reallocate the shares of our common stock we are offering between
the primary offering and the distribution reinvestment plan.
Under the
Securities Act of 1933, as amended (the “Securities Act”), and in some states,
we may not be able to continue the offering for these periods without filing a
new registration statement. We may terminate this offering at any time
prior to the stated termination date.
Compensation
to Advisor and its Affiliates
In our
initial offering, our Advisor, American Realty Capital Advisors, LLC, and its
affiliates receive compensation and reimbursement for services relating to the
initial offering and the investment and management of our assets. In this
follow-on offering, we will have the same compensation and fee structure as in
our initial offering. The most significant items of compensation are
included in the table below. The selling commissions and dealer manager
fee may vary for different categories of purchasers. See the “Plan of
Distribution” section of this prospectus. The table below assumes the
shares are sold through distribution channels associated with the highest
possible selling commissions and dealer manager fees.
Type of Compensation
|
|
Determination of Amount for Initial Offering
and Follow-On Offering
|
|
Amounts Paid in
Initial Offering
(as of June 30, 2010
|
|
|
Estimated Amount
for Maximum
Initial Offering
(150,000,000
shares)
|
|
|
Estimated
Maximum Amount
for Follow-On
Offering
(32,500,000 shares)
|
|
Selling
Commission
|
|
We
will pay to Realty Capital Securities, LLC 7% of gross proceeds of our
primary offering; Realty Capital Securities, LLC will reallow all selling
commissions to participating broker-dealers.
|
|
$ |
18,373,000 |
|
|
$ |
105,000,000 |
|
|
$ |
24,500,000 |
|
Dealer
Manager Fee
|
|
We
will pay to Realty Capital Securities, LLC 3% of gross proceeds of our
primary offering; Realty Capital Securities, LLC may reallow all or a
portion of its dealer manager fees to participating
broker-dealers.
|
|
$ |
8,441,000 |
|
|
$ |
45,000,000 |
|
|
$ |
10,500,000 |
|
Other
Organization and Offering Expenses
|
|
We
will reimburse American Realty Capital Advisors, LLC up to 1.5% of gross
offering proceeds for organization and offering
expenses.
|
|
$ |
14,027,000 |
|
|
$ |
22,500,000
|
|
|
$ |
5,250,000
|
|
Type of Compensation
|
|
Determination of Amount for Initial Offering
and Follow-On Offering
|
|
Amounts Paid in
Initial Offering
(as of June 30, 2010
|
|
|
Estimated Amount
for Maximum
Initial Offering
(150,000,000
shares)
|
|
|
Estimated
Maximum Amount
for Follow-On
Offering
(32,500,000 shares)
|
|
Operational
Stage
|
|
Acquisition
Fees
|
|
We
will pay to American Realty Capital Advisors, LLC 1% of the contract
purchase price of each property acquired.
|
|
$4,982,000
|
|
|
$13,275,000
|
|
|
$3,500,000
|
|
Acquisition
Expenses
|
|
We
will reimburse American Realty Capital Advisors, LLC for acquisition
expenses (including personnel costs) incurred in acquiring property We
expect these fees to be approximately 0.5% of the purchase price of each
property. In no event will the total of all acquisition and advisory
fees and acquisition expenses payable with respect to a particular
investment exceed 4% of the contract purchase price.
|
|
$2,626,000
|
|
|
$6,000,000
|
|
|
$1,750,000
|
|
Asset
Management Fees
|
|
We
will pay American Realty Capital Advisors, LLC a yearly fee equal to 1% of
the contract purchase price of each property plus costs and expenses
incurred by the advisor in providing asset management services, payable
semiannually, based on assets held by us on the measurement date, adjusted
for appropriate closing dates for individual property
acquisitions.
|
|
$495,000
|
|
|
|
Not
determinable at this time. Because the fee is based on a fixed
percentage of aggregate asset value there is no maximum dollar amount of
this fee.
|
|
|
|
Not
determinable at this time. Because the fee is based on a fixed
percentage of aggregate asset value there is no maximum dollar amount of
this fee.
|
|
Property
Management and Leasing Fees
|
|
For
the management and leasing of our properties, we will pay to American
Realty Capital Properties, LLC, an affiliate of our advisor, a property
management fee (a) 2% of gross revenues from our single tenant properties
and (b) 4% of gross revenues from our multi-tenant properties, plus,
in each case, market-based leasing commissions applicable to the
geographic location of the property. We also will reimburse American
Realty Capital Properties, LLC’s costs of managing the properties.
American Realty Capital Properties, LLC or its affiliates may also receive
a fee for the initial leasing of newly constructed properties, which would
generally equal one month’s rent. In the unlikely event that
American Realty Capital Properties, LLC assists a tenant with tenant
improvements, a separate fee may be charged to, and payable by, us.
This fee will not exceed 5% of the cost of the tenant improvements.
The aggregate of all property management and leasing fees paid to our
affiliates plus all payments to third parties for such fees will not
exceed the amount that other nonaffiliated management and leasing
companies generally charge for similar services in the same geographic
location as determined by a survey of brokers and agents in such
area.
|
|
–
|
|
|
|
Not
determinable at this time. Because the fee is based on a fixed
percentage of gross revenue and/or market rates, there is no maximum
dollar amount of this fee.
|
|
|
|
Not
determinable at this time. Because the fee is based on a fixed
percentage of gross revenue and/or market rates, there is no maximum
dollar amount of this fee.
|
|
Type of Compensation
|
|
Determination of Amount for Initial Offering
and Follow-On Offering
|
|
Amounts Paid in
Initial Offering
(as of June 30, 2010
|
|
Estimated Amount
for Maximum
Initial Offering
(150,000,000
shares)
|
|
Estimated
Maximum Amount
for Follow-On
Offering
(32,500,000 shares)
|
Operating
Expenses
|
|
We
will reimburse our advisor’s costs of providing administrative services,
subject to the limitation that we will not reimburse our advisor for any
amount by which our operating expenses (including the asset management
fee) at the end of the four preceding fiscal quarters exceeds the greater
of (a) 2% of average invested assets, or (b) 25% of net income other than
any additions to reserves for depreciation, bad debt or other similar
noncash reserves and excluding any gain from the sale of assets for that
period. Additionally, we will not reimburse our advisor for
personnel costs in connection with services for which the advisor receives
acquisition fees or real estate commissions.
|
|
–
|
|
Not
determinable at this time.
|
|
Not
determinable at this time.
|
Financing
Coordination Fee
|
|
If
our advisor provides services in connection with the origination or
refinancing of any debt that we obtain, and use to acquire properties or
to make other permitted investments, or that is assumed, directly or
indirectly, in connection with the acquisition of properties, we will pay
the advisor a financing coordination fee equal to 1% of the amount
available and/or outstanding under such financing, subject to certain
limitations.
|
|
$2,778,000
|
|
Not
determinable at this time. Because the fee is based on a fixed
percentage of any debt financing there is no maximum dollar amount of this
fee.
|
|
Not
determinable at this time. Because the fee is based on a fixed
percentage of any debt financing there is no maximum dollar amount of this
fee.
|
Liquidation/Listing
Stage
|
Real
Estate Commissions
|
|
A
brokerage commission paid on the sale of property, not to exceed the
lesser of one-half of reasonable, customary and competitive real estate
commission or 3% of the contract price for property sold (inclusive of any
commission paid to outside brokers), in each case, payable to our advisor
if our advisor or its affiliates, as determined by a majority of the
independent directors, provided a substantial amount of services in
connection with the sale.
|
|
–
|
|
Not
determinable at this time. Because the commission is based on a
fixed percentage of the contract price for a sold property, there is no
maximum dollar amount of these commissions.
|
|
Not
determinable at this time. Because the commission is based on a
fixed percentage of the contract price for a sold property, there is no
maximum dollar amount of these commissions.
|
Subordinated
Participation in Net Sale Proceeds (payable only if we are not listed on
an exchange)
|
|
15%
of remaining net sale proceeds after return of capital contributions plus
payment to investors of a 6% cumulative, non-compounded return on the
capital contributed by investors. We cannot assure you that we will
provide this 6% return, which we have disclosed solely as a measure for
our advisor’s and its affiliates’ incentive compensation. We will
not be entitled to the Subordinated Participation in Net Sale Proceeds
unless our investors have received a 6% cumulative non-compounded return
on their capital contributions.
|
|
–
|
|
Not
determinable at this time. There is no maximum amount of these
payments.
|
|
Not
determinable at this time. There is no maximum amount of these
payments.
|
Type of Compensation
|
|
Determination of Amount for Initial Offering
and Follow-On Offering
|
|
Amounts Paid in
Initial Offering
(as of June 30, 2010
|
|
|
Estimated Amount
for Maximum
Initial Offering
(150,000,000
shares)
|
|
Estimated
Maximum Amount
for Follow-On
Offering
(32,500,000 shares)
|
Subordinated
Incentive Listing Fee (payable only if we are listed on an exchange, which
we have no intention to do at this time)
|
|
15%
of the amount by which our adjusted market value plus distributions
exceeds the aggregate capital contributed by investors plus an amount
equal to an 6% cumulative, non-compounded annual return to
investors. We cannot assure you that we will provide this 6% return,
which we have disclosed solely as a measure for our advisor’s and its
affiliates’ incentive compensation. We will not be entitled to the
Subordinated Incentive Listing Fee unless our investors have received a 6%
cumulative non-compounded return on their capital
contributions.
|
|
–
|
|
|
|
Not
determinable at this time. There is no maximum amount of this
fee.
|
|
Not
determinable at this time. There is no maximum amount of this
fee.
|
Status
of Fees Paid and Deferred
The
following table sets forth the fees and expenses paid through June 30, 2010
(amounts in thousands):
|
|
Total Fees Paid
|
|
|
Total Fees Deferred
|
|
|
Total Fees Forgiven
|
|
January
1, 2008 to December 31, 2008
|
|
|
|
|
|
|
|
|
|
Organizational
and Offering Expenses
|
|
$ |
2,289 |
|
|
|
– |
|
|
$ |
200 |
|
Acquisition
Fees
|
|
$ |
1,507 |
|
|
|
– |
|
|
|
– |
|
Finance
Coordination Fees
|
|
$ |
1,131 |
|
|
|
– |
|
|
|
– |
|
Property
Management Fees
|
|
|
– |
|
|
|
– |
|
|
$ |
100 |
|
Asset
Management Fees
|
|
|
– |
|
|
|
– |
|
|
$ |
733 |
|
January
1, 2009 to December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Organizational
and Offering Expenses
|
|
$ |
7,202 |
|
|
|
– |
|
|
$ |
3,800 |
|
Acquisition
Fees
|
|
$ |
1,690 |
|
|
|
– |
|
|
|
– |
|
Finance
Coordination Fees
|
|
$ |
880 |
|
|
|
– |
|
|
|
– |
|
Property
Management Fees
|
|
|
– |
|
|
|
– |
|
|
$ |
300 |
|
Asset
Management Fees
|
|
$ |
145 |
|
|
|
– |
|
|
$ |
1,779 |
|
January
1, 2010 to July 1, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Organizational
and Offering Expenses
|
|
$ |
4,536 |
|
|
|
– |
|
|
|
– |
|
Acquisition
Fees
|
|
$ |
1,785 |
|
|
|
– |
|
|
|
– |
|
Finance
Coordination Fees
|
|
$ |
767 |
|
|
|
– |
|
|
|
– |
|
Property
Management Fees
|
|
|
– |
|
|
|
– |
|
|
$ |
314 |
|
Asset
Management Fees
|
|
$ |
350 |
|
|
|
– |
|
|
$ |
1,663 |
|
Distributions
To
maintain our qualification as a REIT, we are required, among other things, to
generally make aggregate annual distributions to our stockholders of at least
90% of our annual REIT taxable income (which does not necessarily equal net
income as calculated in accordance with GAAP, determined without regard to the
deduction for dividends paid and excluding any net capital gain. Our board
of directors may authorize distributions in excess of those required for us to
maintain REIT status depending on our financial condition and such other factors
as our board of directors deems relevant. We calculate our monthly
distributions based upon daily record and distribution declaration dates so
investors may be entitled to distributions immediately upon purchasing our
shares. The payment date is the 2nd day following each month-end to
stockholders of record at the close of business each day during the applicable
period. As of July 1, 2010, distributions paid to shareholders totaled
$12.3 million. On January 27, 2010, the Board of Directors approved an
increase in its annual cash distribution to $.70, paid monthly. Based on a
$10.00 share price, this increase, effective April 1, 2010, results in an
annualized distribution rate of 7.0%. As of July 27, 2010, cash used to
pay our distributions was entirely generated from funds received from operating
activities and fee waivers from our advisor. Our distributions have not
been paid from any other sources. We have continued to pay distributions
to our shareholders each month since our initial dividend payment. To
date, the Company’s distributions have been paid with a combination of cash
flows from operations and the proceeds from the sales of common stock.
There can be no assurance that cash flows from operations will be sufficient to
pay distributions in future periods. In the event we do not have enough
cash to make distributions in the future, we may borrow, use proceeds from this
offering, issue additional securities or sell assets in order to fund
distributions.
See the
section of this prospectus captioned “Description of Shares — Distribution
Policy and Distributions” for a description of our distributions.
Listing
or Liquidation
We will
seek to list our shares of common stock for trading on the New York Stock
Exchange, NASDAQ Stock Market or any successor exchange or market when and if
our independent directors believe listing would be in the best interest of our
stockholders. However, at this time, we have no intention to list our
shares. We do not anticipate that there will be any market for our common
stock unless and until our shares are listed. If we do not list our shares
of common stock on the New York Stock Exchange or NASDAQ Stock Market by
December 1, 2018, we intend to either:
|
·
|
seek
stockholder approval of an extension or amendment of this listing
deadline; or
|
|
·
|
seek
stockholder approval of the liquidation of our
corporation.
|
If we
seek and do not obtain stockholder approval of an extension or amendment to the
listing deadline, we intend then to adopt a plan of liquidation and commence an
orderly liquidation of our properties.
Distribution
Reinvestment Plan
Pursuant
to our distribution reinvestment plan, you may have the distributions you
receive from us reinvested in additional shares of our common stock. The
purchase price per share under our distribution reinvestment plan will be the
higher of 95% of the fair market value per share as determined by our board of
directors and $9.50 per share. No sales commissions or dealer manager fees will
be paid on shares sold under our distribution reinvestment plan. If you
participate in the distribution reinvestment plan, you will not receive the cash
from your distributions, other than special distributions that are designated by
our board of directors. As a result, you may have a tax liability with respect
to your share of our taxable income, but you will not receive cash distributions
to pay such liability. We may terminate the distribution reinvestment plan at
our discretion at any time upon ten days prior written notice to you.
Additionally, we will be required to discontinue sales of shares under the
distribution reinvestment plan on the earlier of August 5, 2012, which is two
years from the effective date of this offering, or the date we sell all of the
shares registered for sale under the distribution reinvestment plan, unless we
file a new registration statement with the Securities and Exchange Commission
and applicable states. We reserve the right to reallocate the shares of our
common stock we are offering between the primary offering and the distribution
reinvestment plan.
Pursuant
to the initial offering distribution reinvestment, investors from the initial
offering had the option to reinvest the distributions they receive from us in
additional shares of our common stock. The purchase price per share under
our distribution reinvestment plan is currently $9.50 per share.
Share
Repurchase Program
Our board
of directors has adopted a share repurchase program that enables our
stockholders to sell their shares to us in limited circumstances. Our
share repurchase program permits you to sell your shares back to us after you
have held them for at least one year, subject to the significant conditions and
limitations described below.
Our
common stock is currently not listed on a national securities exchange and we
will not seek to list our stock until such time as our independent directors
believe that the listing of our stock would be in the best interest of our
stockholders. In order to provide stockholders with the benefit of interim
liquidity, stockholders who have held their shares for at least one year and who
purchased their shares from us or received the shares through a non-cash
transaction, not in the secondary market, may present all or a portion
consisting of the holder’s shares to us for repurchase at any time in accordance
with the procedures outlined below. At that time, we may, subject to the
conditions and limitations described below, redeem the shares presented for
repurchase for cash to the extent that we have sufficient funds available to us
to fund such repurchase. We will not pay to our board of directors,
advisor or its affiliates any fees to complete any transactions under our share
repurchase program.
During
the term of the initial and follow-on offering and any subsequent public
offering of our shares, the purchase price per share will depend on the length
of time you have held such shares as follows: after one year from the
purchase date - 96.25% of the amount you actually paid for each share; and after
two years from the purchase date - 97.75% of the amount you actually paid for
each share; and after three years from the purchase date - 100% of the amount
you actually paid for each share; (in each case, as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with respect to
our common stock). At any time we are engaged in an offering of shares,
the per share price for shares purchased under our repurchase plan will always
be equal to or lower than the applicable per share offering price.
Thereafter, the per share purchase price will be based on the greater of $10.00
or the then-current net asset value of the shares as determined by our board of
directors (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to our common stock). Our
board of directors will announce any purchase price adjustment and the time
period of its effectiveness as a part of its regular communications with our
stockholders. Our board of directors shall use the following criteria for
determining the net asset value of the shares: value of our assets
(estimated market value) less the estimated market value of our liabilities,
divided by the number of shares. The Board, with advice from the Advisor,
(i) will make internal valuations of the market value of its assets based upon
the current capitalization rates of similar properties in the market, recent
transactions for similar properties acquired by the Company and any extensions,
cancellations, modifications or other material events affecting the leases,
changes in rents or other circumstances related to such properties, (ii) review
internal appraisals prepared by the Advisor following standard commercial real
estate appraisal practice and (iii) every three years or earlier, in rotation
will have all of the properties appraised by an external appraiser. Upon
the death or disability of a stockholder, upon request, we will waive the
one-year holding requirement. Shares repurchased in connection with the
death or disability of a stockholder will be repurchased at a purchase price
equal to the price actually paid for the shares during the offering, or if not
engaged in the offering, the per share purchase price will be based on the
greater of $10.00 or the then-current net asset value of the shares as
determined by our board of directors (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to our common
stock). In addition, we may waive the holding period in the event of a
stockholder’s bankruptcy or other exigent circumstances.
We will
redeem our shares on the last business day of the month following the end of
each quarter. Requests for repurchases must be received on or prior to the
end of the quarter in order for us to repurchase the shares as of the end of the
next month. You may withdraw your request to have your shares repurchased
at any time prior to the last day of the applicable quarter. Shares
presented for repurchase will continue to earn daily distributions up to and
including the repurchase date.
Our board
of directors may choose to amend, suspend or terminate our share repurchase
program upon 30 days’ notice at any time.
On
November 12, 2008, the Company’s board of directors modified the Share
Repurchase Program (“share repurchase plan”) to fund purchases under the share
repurchase plan, not only from the initial offering’s Distribution Reinvestment
Plan (“DRIP”), but also from operating funds of the Company. Accordingly,
purchases under the share repurchase plan, subject to the terms of the share
repurchase plan, may be funded from the proceeds from the sale of shares under
the DRIP, from proceeds of the sale of shares in a public offering, and with
other available allocated operating funds. However, purchases under the
share repurchase plan by the Company will be limited in any calendar year to 5%
of the weighted average number of shares outstanding during the prior
year. The other terms and conditions of the share repurchase plan remain
unchanged.
As of
June 30, 2010, we received requests to redeem 77,759 common shares pursuant to
our share repurchase program. We redeemed 100% of the redemption requests
at an average price per share of $9.91 per share. We funded share
redemptions for the periods noted above from the cumulative proceeds of the sale
of our common shares pursuant to our initial offering’s distribution
reinvestment plan and from operating funds of the Company
Description
of Shares
Uncertificated
Shares
Our board
of directors has authorized the issuance of shares of our stock without
certificates. We expect that, unless and until our shares are listed on
the New York Stock Exchange or NASDAQ Stock Market, we will not issue shares in
certificated form. Our transfer agent maintains a stock ledger that
contains the name and address of each stockholder and the number of shares that
the stockholder holds. With respect to uncertificated stock, we will
continue to treat the stockholder registered on our stock ledger as the owner of
the shares until the record owner and the new owner delivers a properly executed
stock transfer form to us, along with a fee to cover reasonable transfer costs,
in an amount determined by our board of directors. We will provide the
required form to you upon request. The transfer will be effective and the
transferee of the shares will be recognized as the holder of such shares within
five business days of our receipt of the required documentation, subject to
restrictions in our charter. If the transferor (original owner) is
participating in the Share Repurchase Program at the time of transfer, then
distributions owed and paid after the transfer date will be paid in the form of
cash and not reinvested in additional shares. The transferor will continue
to earn dividends up to and including the transfer date.
Stockholder
Voting Rights and Limitations
We hold
annual meetings of our stockholders for the purpose of electing our directors
and conducting other business matters that may be presented at such
meetings. We may also call special meetings of stockholders from time to
time. You are entitled to one vote for each share of common stock you own
at any of these meetings.
Restriction
on Ownership and Transfer
Our
charter contains restrictions on ownership and transfer of the shares that,
among other restrictions, prevent any one person from owning more than 9.8% in
value of the aggregate of our outstanding shares of stock and not more than 9.8%
(in value or in number of shares, whichever is more restrictive) of any class or
series of shares of our stock, unless exempted by our board of directors.
For a more complete description of the shares, including this and other
restrictions on the ownership and transfer of our shares, please see the
“Description of Shares” section of this prospectus. Our charter also
limits your ability to transfer your shares to prospective stockholders unless
(a) they meet the minimum suitability standards regarding income or net worth,
which are described in the “Suitability Standards” section immediately following
the cover page of this prospectus, and (b) the transfer complies with minimum
purchase requirements, which are described above in the sections entitled
“Suitability Standards” and “How to Subscribe.”
About
this Prospectus
This
prospectus is part of a registration statement that we filed with the SEC using
a continuous offering process. Periodically, as we make material
investments or have other material developments, we will provide a prospectus
supplement that may add, update or change information contained in this
prospectus. Any statement that we make in this prospectus will be modified
or superseded by any inconsistent statement made by us in a subsequent
prospectus supplement. The registration statement we filed with the SEC
includes exhibits that provide more detailed descriptions of the matters
discussed in this prospectus. You should read this prospectus and the
related exhibits filed with the SEC and any prospectus supplement, together with
additional information described below under “Incorporation of Certain
Information by Reference” and “Where You Can Find Additional
Information.”
RISK
FACTORS
An
investment in our common stock involves various risks and uncertainties.
You should carefully consider the following risk factors in conjunction with the
other information contained in this prospectus before purchasing our common
stock. The risks discussed in this prospectus can adversely affect our
business, operating results, prospects and financial condition. These
risks could cause the value of our common stock to decline and could cause you
to lose all or part of your investment. The risks and uncertainties
described below are not the only ones we face but do represent those risks and
uncertainties that we believe are material to our business, operating results,
prospects and financial condition. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also harm our
business.
Risks
Related to an Investment in American Realty Capital Trust, Inc.
Except
as described herein, we have no prior operating history or established financing
sources, and the prior performance of real estate investment programs sponsored
by affiliates of our advisor may not be an indication of our future
results.
Except as
described in this prospectus, we have no operating history and you should not
rely upon the past performance of other real estate investment programs
sponsored by affiliates of our advisor to predict our future results. We
were incorporated on August 17, 2007. We have limited investments in real
estate or otherwise. Although Mr. Schorsch, Mr. Kahane and other members
of our advisor’s management have significant experience in the acquisition,
finance, management and development of commercial real estate, the prior
performance of real estate investment programs sponsored by affiliates of Mr.
Schorsch, Mr. Kahane and our advisor may not be indicative of our future
results.
You
should consider our prospects in light of the risks, uncertainties and
difficulties frequently encountered by companies that are, like us, in their
early stage of development. To be successful in this market, we must,
among other things:
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identify
and acquire investments that further our investment
strategies;
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increase
awareness of the American Realty Capital Trust, Inc. name within the
investment products market;
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expand
and maintain our network of licensed securities brokers and other
agents;
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attract,
integrate, motivate and retain qualified personnel to manage our
day-to-day operations;
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respond
to competition for our targeted real estate properties and other
investments as well as for potential investors;
and
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continue
to build and expand our operations structure to support our
business.
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We cannot
guarantee that we will succeed in achieving these goals, and our failure to do
so could cause you to lose all or a portion of your investment.
Please
also see herein the section entitled “Adverse Business Developments and
Conditions.”
As
of July 27, 2010, we have made 169 geographically diverse acquisitions but have
not identified any additional properties to acquire with the net proceeds we
will receive from this follow-on offering, and therefore, you will not have the
opportunity to evaluate all of our investments before we make them, which makes
an investment in us more speculative.
Other
than the acquisitions as described in the “Investment Objectives and Policies”
section herein, you will be unable to evaluate the manner in which the net
proceeds are invested. Additionally, we will not provide you with
information to evaluate our investments prior to our acquisition of
properties. We will seek to invest substantially all of the offering
proceeds available for investment, after the payment of fees and expenses, in
the acquisition of freestanding, single-tenant commercial properties net leased
to investment grade or other creditworthy tenants. We may also, in the
discretion of our advisor, invest in other types of real estate or in entities
that invest in real estate. We will acquire or invest in properties
located only in the United States and the Commonwealth of Puerto Rico. In
addition, our advisor may make or invest in mortgage, bridge or mezzanine loans
or participations therein on our behalf if our board of directors determines,
due to the state of the real estate market or in order to diversify our
investment portfolio or otherwise, that such investments are advantageous to
us. We have established policies relating to the creditworthiness of
tenants of our properties, but our board of directors will have wide discretion
in implementing these policies, and you will not have the opportunity to
evaluate potential tenants. For a more detailed discussion of our
investment policies, see the “Investment Objectives and Policies —Acquisition
and Investment Policies” section of this prospectus.
There
is no public trading market for our shares and there may never be one;
therefore, it will be difficult for you to sell your shares.
There
currently is no public market for our shares and there may never be one.
If you are able to find a buyer for your shares, you may not sell your shares
unless the buyer meets applicable suitability and minimum purchase
standards. Our charter also prohibits the ownership of more than 9.8% in
value of the aggregate of our outstanding shares of stock and not more than 9.8%
(in value or in number of shares, whichever is more restrictive) of any class or
series of shares of our stock by a single investor, unless exempted by our board
of directors, which may inhibit large investors from desiring to purchase your
shares. Moreover, our share repurchase program includes numerous
restrictions that would limit your ability to sell your shares to us. Our
board of directors may reject any request for repurchase of shares, or amend,
suspend or terminate our share repurchase program upon 30 days’ notice.
Therefore, it will be difficult for you to sell your shares promptly or at
all. If you are able to sell your shares, you will likely have to sell
them at a substantial discount to the price you paid for the shares. It
also is likely that your shares would not be accepted as the primary collateral
for a loan. You should purchase the shares only as a long-term investment
because of the illiquid nature of the shares. See “Suitability Standards,”
“Description of Shares — Restrictions on Ownership and Transfer” and “Share
Repurchase Program” elsewhere for a more complete discussion on the restrictions
on your ability to transfer your shares.
If
we, through American Realty Capital Advisors, LLC, are unable to find suitable
investments, then we may not be able to achieve our investment objectives or pay
distributions.
Our
ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of American Realty Capital Advisors, LLC, our
advisor, in acquiring of our investments, selecting tenants for our properties
and securing independent financing arrangements. We currently do not own
any properties or have any operations, financing or investments. Except
for investors who purchase shares in this offering after such time as this
prospectus is supplemented to describe one or more identified investments, you
will have no opportunity to evaluate the terms of transactions or other economic
or financial data concerning our investments. You must rely entirely on
the management ability of American Realty Capital Advisors, LLC and the
oversight of our board of directors. We cannot be sure that American
Realty Capital Advisors, LLC will be successful in obtaining suitable
investments on financially attractive terms or that, if it makes investments on
our behalf, our objectives will be achieved. If we, through American
Realty Capital Advisors, LLC, are unable to find suitable investments, we will
hold the proceeds of this offering in an interest-bearing account, invest the
proceeds in short-term, investment-grade investments or, if we cannot find at
least one suitable investment within one year after we reach our minimum
offering, and if our board of directors determines it is in our best interests,
liquidate. In such an event, our ability to pay distributions to our
stockholders would be adversely affected.
We
may suffer from delays in locating suitable investments, which could adversely
affect our ability to make distributions and the value of your
investment.
We could
suffer from delays in locating suitable investments, particularly as a result of
our reliance on our advisor at times when management of our advisor is
simultaneously seeking to locate suitable investments for other affiliated
programs. Delays we encounter in the selection, acquisition and, in the
event we develop properties, development of income-producing properties, likely
would adversely affect our ability to make distributions and the value of your
overall returns. In such event, we may pay all or a substantial portion of
our distributions from the proceeds of this offering or from borrowings in
anticipation of future cash flow, which may constitute a return of your
capital. Distributions from the proceeds of this offering or from
borrowings also could reduce the amount of capital we ultimately invest in
properties. This, in turn, would reduce the value of your
investment. In particular, where we acquire properties prior to the start
of construction or during the early stages of construction, it will typically
take several months to complete construction and rent available space.
Therefore, you could suffer delays in the receipt of cash distributions
attributable to those particular properties. If American Realty Capital
Advisors, LLC is unable to obtain suitable investments, we will hold the
proceeds of this offering in an interest-bearing account or invest the proceeds
in short-term, investment-grade investments. If we cannot invest proceeds
from this offering within a reasonable amount of time, or if our board of
directors determines it is in the best interests of our stockholders, we will
return the uninvested proceeds to investors.
If
we are unable to raise substantial funds, we will be limited in the number and
type of investments we may make, the value of your investment in us will
fluctuate with the performance of the specific properties we
acquire.
This
offering is being made on a best efforts basis, whereby the brokers
participating in the offering are only required to use their best efforts to
sell our shares and have no firm commitment or obligation to purchase any of the
shares. As a result, the amount of proceeds we raise in this offering may
be substantially less than the amount we would need to achieve a broadly
diversified property portfolio. If we are unable to raise substantial
proceeds in this offering, we will make fewer investments resulting in less
diversification in terms of the number of investments owned, the geographic
regions in which our investments are located and the types of investments that
we make. In such event, the likelihood of our profitability being affected
by the performance of any one of our investments will increase. If we only
are able to make a few investments, we would not achieve any asset
diversification. Additionally, we are not limited in the number or size of
our investments or the percentage of net proceeds we may dedicate to a single
investment. Your investment in our shares will be subject to greater risk
to the extent that we lack a diversified portfolio of investments. In
addition, our inability to raise substantial funds would increase our fixed
operating expenses as a percentage of gross income, and our financial condition
and ability to pay distributions could be adversely affected.
If
our advisor loses or is unable to obtain key personnel, our ability to implement
our investment strategies could be delayed or hindered, which could adversely
affect our ability to make distributions and the value of your
investment.
Our
success depends to a significant degree upon the contributions of certain of our
executive officers and other key personnel of our advisor, including Nicholas S.
Schorsch and William M. Kahane, each of whom would be difficult to
replace. Our advisor does not have an employment agreement with any of
these key personnel and we cannot guarantee that all, or any particular one,
will remain affiliated with us and/or our advisor. If any of our key
personnel were to cease their affiliation with our advisor, our operating
results could suffer. We maintain separate key man life insurance policies
on each of Nicholas S. Schorsch, William M. Kahane, Brian S. Block, Peter M.
Budko and Edward M. Weil, Jr. We believe that our future success depends,
in large part, upon our advisor's ability to hire and retain highly skilled
managerial, operational and marketing personnel. Competition for such
personnel is intense, and we cannot assure you that our advisor will be
successful in attracting and retaining such skilled personnel. If our
advisor loses or is unable to obtain the services of key personnel, our ability
to implement our investment strategies could be delayed or hindered, and the
value of your investment may decline.
Our
rights and the rights of our stockholders to recover claims against our
officers, directors and our advisor are limited, which could reduce your and our
recovery against them if they cause us to incur losses.
Maryland
law provides that a director has no liability in that capacity if he or she
performs his or her duties in good faith, in a manner he or she reasonably
believes to be in the corporation’s best interests and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances. Our charter, in the case of our directors, officers,
employees and agents, and the advisory agreement, in the case of our advisor,
generally require us to indemnify our directors, officers, employees and agents
and our advisor and its affiliates for actions taken by them in good faith and
without negligence or misconduct. Additionally, our charter limits the
liability of our directors and officers subject to the conditions imposed by
Maryland law, subject to the limitations required by the Statement of Policy
Regarding Real Estate Investment Trusts published by the North American
Securities Administrators Associations, also known as the NASAA REIT
Guidelines. Although our charter does not allow us to exonerate and
indemnify our directors and officers to a greater extent than permitted under
Maryland law and the NASAA REIT Guidelines, we and our stockholders may have
more limited rights against our directors, officers, employees and agents, and
our advisor and its affiliates, than might otherwise exist under common law,
which could reduce your and our recovery against them. In addition, we may
be obligated to fund the defense costs incurred by our directors, officers,
employees and agents or our advisor in some cases which would decrease the cash
otherwise available for distribution to you. See the section captioned
“Management — Limited Liability and Indemnification of Directors, Officers,
Employees and Other Agents” elsewhere herein.
Risks
Related to Conflicts of Interest
We will
be subject to conflicts of interest arising out of our relationships with our
advisor and its affiliates, including the material conflicts discussed
below. The “Conflicts of Interest” section of this prospectus provides a
more detailed discussion of the conflicts of interest between us and our advisor
and its affiliates, and our policies to reduce or eliminate certain potential
conflicts.
American
Realty Capital Advisors, LLC will face conflicts of interest relating to the
purchase and leasing of properties, and such conflicts may not be resolved in
our favor, which could adversely affect our investment
opportunities.
Affiliates
of our advisor have sponsored other real estate investment programs, American
Realty Capital New York Recovery REIT, Inc. (“Recovery REIT”) and Phillips
Edison-ARC Shopping Center REIT Inc. (“PECO”). Recovery REIT intends to
acquire quality income-producing commercial real estate, as well as make real
estate investments that relate to office, retail, multi-family residential,
industrial and hotel property types, located in the New York metropolitan area,
primarily New York City. PECO intends to invest primarily in
necessity-based neighborhood and community shopping centers throughout the
United States, with a focus on grocery anchored shopping centers.
Affiliates of our advisor may sponsor additional other real estate investment
programs in the future. We may buy properties at the same time and/or in
the same geographic areas as one or more of the other American Realty
Capital-sponsored programs managed by officers and key personnel of American
Realty Capital Advisors, LLC. There is a risk that American Realty Capital
Advisors, LLC will choose a property that provides lower returns to us than a
property purchased by another American Realty Capital-sponsored program.
We cannot be sure that officers and key personnel acting on behalf of American
Realty Capital Advisors, LLC and on behalf of managers of other American Realty
Capital-sponsored programs will act in our best interests when deciding whether
to allocate any particular property to us. Also, although our board of
directors adopted a policy whereby we may not acquire properties from affiliated
entities, we may in the future, with the approval of our board, change our
policy and acquire properties from, or sell properties to, other American Realty
Capital-sponsored programs, and although we will do so consistent with our
investment procedures, objectives and policies, transactions entered between us
and our affiliates will not be subject to arm’s-length negotiations, which could
mean that the acquisitions may be on terms less favorable to us than those
negotiated with unaffiliated parties. However, our charter provides that
the purchase price of any property acquired from an affiliate may not exceed its
fair market value as determined by a qualified independent appraiser selected by
our independent directors. In addition, a majority of our directors,
including a majority of independent directors, who have no financial interest in
the transaction, must determine that the transaction is fair and reasonable to
us and that the transaction is at a price to us not greater than the cost to our
affiliate or, if the price to us exceeds the cost paid by our affiliate, that
there is substantial justification for the excess cost. Furthermore, if
one of the other American Realty Capital-sponsored programs attracts a tenant
that we are competing for, we could suffer a loss of revenue due to delays in
locating another suitable tenant. You will not have the opportunity to
evaluate the manner in which these conflicts of interest are resolved before or
after making your investment. Similar conflicts of interest may apply if
our advisor determines to make or purchase mortgage, bridge or mezzanine loans
or participations therein on our behalf, since other American Realty
Capital-sponsored programs may be competing with us for these
investments.
American
Realty Capital Advisors, LLC faces conflicts of interest relating to joint
ventures, which could result in a disproportionate benefit to the other venture
partners at our expense.
We may
enter into joint ventures with other American Realty Capital-sponsored programs
for the acquisition, development or improvement of properties. American
Realty Capital Advisors, LLC may have conflicts of interest in determining which
American Realty Capital-sponsored program should enter into any particular joint
venture agreement. The co-venturer may have economic or business interests
or goals that are or may become inconsistent with our business interests or
goals. In addition, American Realty Capital Advisors, LLC may face a
conflict in structuring the terms of the relationship between our interests and
the interest of the affiliated co-venturer and in managing the joint
venture. Since American Realty Capital Advisors, LLC and its affiliates
will control both the affiliated co-venturer and, to a certain extent, us,
agreements and transactions between the co-venturers with respect to any such
joint venture will not have the benefit of arm’s-length negotiation of the type
normally conducted between unrelated co-venturers, which may result in the
co-venturer receiving benefits greater than the benefits that we receive.
In addition, we may assume liabilities related to the joint venture that exceeds
the percentage of our investment in the joint venture.
American
Realty Capital Advisors, LLC and its officers and employees and certain of our
key personnel face competing demands relating to their time, and this may cause
our operating results to suffer.
American
Realty Capital Advisors, LLC and its officers and employees and certain of our
key personnel and their respective affiliates are key personnel, general
partners and sponsors of other real estate programs having investment objectives
and legal and financial obligations similar to ours and may have other business
interests as well. Because these persons have competing demands on their
time and resources, they may have conflicts of interest in allocating their time
between our business and these other activities. All of our executive
officers will spend at least a majority of their time involved in our operations
and Messrs. Budko, Block and Weil will spend substantially all of their time
involved in our operations. However, during times of intense activity in
other programs and ventures, they may devote less time and fewer resources to
our business than is necessary or appropriate. If this occurs, the returns
on our investments may suffer.
Our
officers face conflicts of interest related to the positions they hold with
affiliated entities, which could hinder our ability to successfully implement
our business strategy and to generate returns to you.
Each of
our executive officers, including Nicholas S. Schorsch, who also serves as the
chairman of our board of directors, and William M. Kahane, president and chief
operating officer, also are officers of our advisor, our property manager, our
dealer manager and other affiliated entities. As a result, these
individuals owe fiduciary duties to these other entities and their stockholders
and limited partners, which fiduciary duties may conflict with the duties that
they owe to us or our stockholders. Their loyalties to these other
entities could result in actions or inactions that are detrimental to our
business, which could harm the implementation of our business strategy and our
investment and leasing opportunities. Conflicts with our business and
interests are most likely to arise from involvement in activities related to (a)
allocation of new investments and management time and services between us and
the other entities, (b) our purchase of properties from, or sale of properties,
to affiliated entities, (c) the timing and terms of the investment in or
sale of an asset, (d) development of our properties by affiliates, (e)
investments with affiliates of our advisor, (f) compensation to our advisor, and
(g) our relationship with our dealer manager and property manager. If we
do not successfully implement our business strategy, we may be unable to
generate cash needed to make distributions to you and to maintain or increase
the value of our assets.
American
Realty Capital Advisors, LLC faces conflicts of interest relating to the
incentive fee structure under our advisory agreement, which could result in
actions that are not necessarily in the long-term best interests of our
stockholders.
Under our
advisory agreement, American Realty Capital Advisors, LLC or its affiliates will
be entitled to fees that are structured in a manner intended to provide
incentives to our advisor to perform in our best interests and in the best
interests of our stockholders. However, because our advisor does not
maintain a significant equity interest in us and is entitled to receive
substantial minimum compensation regardless of performance, our advisor’s
interests are not wholly aligned with those of our stockholders. In that
regard, our advisor could be motivated to recommend riskier or more speculative
investments in order for us to generate the specified levels of performance or
sales proceeds that would entitle our advisor to fees. In addition, our
advisor’s or its affiliates’ entitlement to fees upon the sale of our assets and
to participate in sale proceeds could result in our advisor recommending sales
of our investments at the earliest possible time at which sales of investments
would produce the level of return that would entitle the advisor to compensation
relating to such sales, even if continued ownership of those investments might
be in our best long-term interest. Our advisory agreement will require us
to pay a performance-based termination fee to our advisor or its affiliates in
the event that we terminate the advisor prior to the listing of our shares for
trading on an exchange or, absent such listing, in respect of its participation
in net sales proceeds. To avoid paying this fee, our independent directors
may decide against terminating the advisory agreement prior to our listing of
our shares or disposition of our investments even if, but for the termination
fee, termination of the advisory agreement would be in our best interest.
In addition, the requirement to pay the fee to the advisor or its affiliates at
termination could cause us to make different investment or disposition decisions
than we would otherwise make, in order to satisfy our obligation to pay the fee
to the terminated advisor. Moreover, our advisor will have the right to
terminate the advisory agreement upon a change of control of our company and
thereby trigger the payment of the performance fee, which could have the effect
of delaying, deferring or preventing the change of control.
There
is no separate counsel for us and our affiliates, which could result in
conflicts of interest.
Proskauer
Rose LLP acts as legal counsel to us and also represents our advisor and some of
its affiliates. There is a possibility in the future that the interests of
the various parties may become adverse and, under the Code of Professional
Responsibility of the legal profession, Proskauer Rose LLP may be precluded from
representing any one or all of such parties. If any situation arises in
which our interests appear to be in conflict with those of our advisor or its
affiliates, additional counsel may be retained by one or more of the parties to
assure that their interests are adequately protected. Moreover, should a
conflict of interest not be readily apparent, Proskauer Rose LLP may
inadvertently act in derogation of the interest of the parties which could
affect our ability to meet our investment objectives.
We
may have increased exposure to liabilities from litigation as a result of our
participation in the Section 1031 Exchange Program, which increases the risks
you face as a stockholder.
An
affiliate of American Realty Capital Advisors, LLC, our advisor, has developed a
program to facilitate real estate acquisitions for persons (“1031 Participants”)
who seek to reinvest proceeds from a real estate sale and qualify that
reinvestment for like-kind exchange treatment under Section 1031 of the Internal
Revenue Code (“Section 1031 Exchange Program”). The program is described
in greater detail under “Investment Objectives and Criteria —Acquisition and
Investment Policies — Section 1031 Exchange Program.” The Section 1031
Exchange Program involves a private placement of co-tenancy interests in real
estate. There are significant tax and securities disclosure risks
associated with these private placement offerings of co-tenancy interests to
1031 Participants. For example, in the event that the Internal Revenue
Service conducts an audit of the purchasers of co tenancy interests and
successfully challenges the qualification of the transaction as a like-kind
exchange, purchasers of co-tenancy interests may file a lawsuit against the
entity offering the co- tenancy interests and its sponsors. We anticipate
providing certain financial guarantees, described in “Investment Objectives and
Policies — Section 1031 Exchange Program,” in the event co-tenancy interests in
such offerings are not sold and could therefore be named in or otherwise
required to defend against lawsuits brought by 1031 Participants. Any
amounts we are required to expend for any such litigation claims may reduce the
amount of funds available for distribution to you. In addition, disclosure
of any such litigation may limit our future ability to raise additional capital
through the sale of stock or borrowings. To date, we have engaged in four
Section 1031 Exchange Programs raising aggregate proceeds of
$10,080,802.
We
are subject to risks associated with co-tenancy arrangements that are not
otherwise present in a real estate investment; these risks could reduce the
value of our co-tenancy investments and your overall return.
Our
participation in the Section 1031 Exchange Program involves an obligation to
purchase any co-tenancy interests in a property that remain unsold at the
completion of a Section 1031 Exchange Program private placement offering.
Accordingly, we could be required to purchase the unsold co-tenancy interests
and thus become subject to the risks of ownership of properties in a co-tenancy
arrangement with unrelated third parties.
Ownership
of co-tenancy interests involves risks not otherwise present with an investment
in real estate such as the following:
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the
risk that a co-tenant may at any time have economic or business interests
or goals that are inconsistent with our business interests or
goals;
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the
risk that a co-tenant may be in a position to take action contrary to our
instructions or requests or contrary to our policies or objectives;
or
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the
possibility that a co-tenant might become insolvent or bankrupt, which may
be an event of default under mortgage loan financing documents, or allow
the bankruptcy court to reject the tenants-in-common agreement or
management agreement entered into by the co-tenants owning interests in
the property.
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Any of
the above might subject a property to liabilities in excess of those
contemplated and thus reduce your returns. In the event that our interests
become adverse to those of the other co-tenants, we may not have the contractual
right to purchase the co-tenancy interests from the other co-tenants. Even
if we are given the opportunity to purchase such co-tenancy interests in the
future, we cannot guarantee that we will have sufficient funds available at the
time to purchase co-tenancy interests from the 1031 Participants. We might
want to sell our co-tenancy interests in a given property at a time when the
other cotenants in such property do not desire to sell their interests.
Therefore, we may not be able to sell our interest in a property at the time we
would like to sell. In addition, we anticipate that it will be much more
difficult to find a willing buyer for our co-tenancy interests in a property
than it would be to find a buyer for a property we owned entirely.
Our
participation in the Section 1031 Exchange Program may limit our ability to
borrow funds in the future; this could reduce the number of investments we can
make and limit our ability to make distributions to you.
Institutional
lenders may view our obligations under agreements to acquire unsold co-tenancy
interests in properties as a contingent liability against our cash or other
assets, which may limit our ability to borrow funds in the future. Lenders
providing lines of credit may restrict our ability to draw on our lines of
credit by the amount of our potential obligation. Further, our lenders may
view such obligations in such a manner as to limit our ability to borrow funds
based on regulatory restrictions on lenders that limit the amount of loans they
can make to any one borrower. These events could limit our operating
flexibility and our ability to make distributions to you.
Risks
Related to This Offering and Our Corporate Structure
The
limit on the number of shares a person may own may discourage a takeover that
could otherwise result in a premium price to our stockholders.
Our
charter, with certain exceptions, authorizes our directors to take such actions
as are necessary and desirable to preserve our qualification as a REIT.
Unless exempted by our board of directors, no person may own more than 9.8% in
value of the aggregate of our outstanding shares of stock and not more than 9.8%
(in value or in number of shares, whichever is more restrictive) of any class or
series of shares of our stock. This and other restrictions in our charter
on the ownership and transfer of our stock may have the effect of delaying,
deferring or preventing a change in control of us, including an extraordinary
transaction (such as a merger, tender offer or sale of all or substantially all
of our assets) that might provide a premium price for holders of our common
stock. See the “Description of Shares — Restrictions on Ownership and
Transfer” section of this prospectus.
Our
charter permits our board of directors to issue stock with terms that may
subordinate the rights of common stockholders or discourage a third party from
acquiring us in a manner that might result in a premium price to our
stockholders.
Our
charter permits our board of directors to issue up to 250,000,000 shares of
stock. In addition, our board of directors, without any action by our
stockholders, may amend our charter from time to time to increase or decrease
the aggregate number of shares or the number of shares of any class or series of
stock that we have authority to issue. Our board of directors may classify
or reclassify any unissued preferred stock and establish the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of repurchase of any such
stock. Thus, our board of directors could authorize the issuance of
preferred stock with terms and conditions that could have a priority as to
distributions and amounts payable upon liquidation over the rights of the
holders of our common stock. Preferred stock could also have the effect of
delaying, deferring or preventing a change in control of us, including an
extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium price for holders
of our common stock. See the “Description of Shares — Preferred Stock”
section of this prospectus.
Maryland
law prohibits certain business combinations, which may make it more difficult
for us to be acquired and may limit your ability to exit the
investment.
Under
Maryland law, “business combinations” between a Maryland corporation and an
interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business combinations
include a merger, consolidation, share exchange or, in circumstances specified
in the statute, an asset transfer or issuance or reclassification of equity
securities. An interested stockholder is defined as:
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any
person who beneficially owns 10% or more of the voting power of the
corporation’s shares; or
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an
affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then outstanding voting stock of
the corporation.
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A person
is not an interested stockholder under the statute if the board of directors
approved in advance the transaction by which he or she otherwise would have
become an interested stockholder. However, in approving a transaction, the
board of directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the
board.
After the
five-year prohibition, any business combination between the Maryland corporation
and an interested stockholder generally must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at
least:
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80%
of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation;
and
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two-thirds
of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the interested stockholder with whom
or with whose affiliate the business combination is to be effected or held
by an affiliate or associate of the interested
stockholder.
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These
super-majority vote requirements do not apply if the corporation’s stockholders
receive a minimum price, as defined under Maryland law, for their shares in the
form of cash or other consideration in the same form as previously paid by the
interested stockholder for its shares. The business combination statute
permits various exemptions from its provisions, including business combinations
that are exempted by the board of directors prior to the time that the
interested stockholder becomes an interested stockholder. Pursuant to the
statute, our board of directors has exempted any business combination involving
American Realty Capital Advisors, LLC or any affiliate of American Realty
Capital Advisors, LLC. Consequently, the five-year prohibition and the
super-majority vote requirements will not apply to business combinations between
us and American Realty Capital Advisors, LLC or any affiliate of American Realty
Capital Advisors, LLC. As a result, American Realty Capital Advisors, LLC
and any affiliate of American Realty Capital Advisors, LLC may be able to enter
into business combinations with us that may not be in the best interest of our
stockholders, without compliance with the super-majority vote requirements and
the other provisions of the statute. The business combination statute may
discourage others from trying to acquire control of us and increase the
difficulty of consummating any offer. For a more detailed discussion of
the Maryland laws governing us and the ownership of our shares of common stock,
see the section of this prospectus captioned “Description of Shares — Business
Combinations.”
Maryland
law also limits the ability of a third party to buy a large stake in us and
exercise voting power in electing directors.
The
Maryland Control Share Acquisition Act provides that “control shares” of a
Maryland corporation acquired in a “control share acquisition” have no voting
rights except to the extent approved by the corporation’s disinterested
stockholders by a vote of two-thirds of the votes entitled to be cast on the
matter. Shares of stock owned by interested stockholders, that is, by the
acquirer, by officers or by directors who are employees of the corporation, are
excluded from shares entitled to vote on the matter. “Control shares” are
voting shares of stock that would entitle the acquirer to exercise voting power
in electing directors within specified ranges of voting power. Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A “control
share acquisition” means the acquisition of control shares. The control
share acquisition statute does not apply (a) to shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the transaction
or (b) to acquisitions approved or exempted by the articles of incorporation or
bylaws of the corporation. Our bylaws contain a provision exempting from
the Control Share Acquisition act any and all acquisitions of our common stock
by American Realty Capital Advisors, LLC or any affiliate of American Realty
Capital Advisors, LLC. This statute could have the effect of discouraging
offers from third parties to acquire us and increasing the difficulty of
successfully completing this type of offer by anyone other than our affiliates
or any of their affiliates. For a more detailed discussion on the Maryland
laws governing control share acquisitions, see the section of this prospectus
captioned “Description of Shares — Control Share Acquisitions.”
If
we are required to register as an investment company under the Investment
Company Act, we could not continue our business, which may significantly reduce
the value of your investment.
We are
not registered as an investment company under the Investment Company Act of
1940, as amended (Investment Company Act). Under Section 3(a)(1)(A) of the
Investment Company Act, a company is deemed to be an “investment company” if it
is, or holds itself out as being, engaged primarily, or proposes to engage
primarily, in the business of investing, reinvesting or trading in
securities. Under Section 3(a)(1)(C) of the Investment Company Act, a
company is deemed to be an “investment company” if it is engaged, or proposes to
engage, in the business of investing, reinvesting, owning, holding or trading in
securities and owns or propose to acquire “investment securities” having a value
exceeding 40% of the value of its total assets on an unconsolidated basis, which
we refer to as the “40 test.” If we would ever inadvertently fall within
one of the definitions of “investment company,” we intend to rely on the
exception provided by Section 3(c)(5)(C) of the Investment Company Act and
certain No-Action Letters from the Securities and Exchange Commission.
Under Section 3(c)(5)(C), the SEC staff generally requires a company to maintain
at least 55% of its assets directly in qualifying assets and at least 80% of the
entity’s assets in qualifying assets and in a broader category of real estate
related assets to qualify for this exception. Mortgage-related securities
may or may not constitute such qualifying assets, depending on the
characteristics of the mortgage-related securities, including the rights that we
have with respect to the underlying loans. Our ownership of
mortgage-related securities, therefore, is limited by provisions of the
Investment Company Act and SEC staff interpretations. See the section
entitled “Investment Objectives and Policies — Investment Company Act of 1940”
in this prospectus. We intend to monitor compliance with these
requirements on an ongoing basis. If we were obligated to register as an
investment company, we would have to comply with a variety of substantive
requirements under the Investment Company Act imposing, among other
things:
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limitations
on capital structure;
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restrictions
on specified investments;
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prohibitions
on transactions with affiliates;
and
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compliance
with reporting, record keeping, voting, proxy disclosure and other rules
and regulations that would significantly change our
operations.
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In order
to maintain our exemption from regulation under the Investment Company Act, we
must engage primarily in the business of buying real estate, and these
investments must be made within a year after the offering ends. If we are
unable to invest a significant portion of the proceeds of this offering in
properties within one year of the termination of the offering, we may avoid
being required to register as an investment company by temporarily investing any
unused proceeds in government securities with low returns. This would
reduce the cash available for distribution to investors and possibly lower your
returns.
The
method we use to classify our assets for purposes of the Investment Company Act
will be based in large measure upon no-action positions taken by the SEC staff
in the past. These no-action positions were issued in accordance with
factual situations that may be substantially different from the factual
situations we may face, and a number of these no-action positions were issued
more than ten years ago. No assurance can be given that the SEC staff will
concur with our classification of our assets. In addition, the SEC staff,
may, in the future, issue further guidance that may require us to re-classify
our assets for purposes of qualifying for an exclusion from regulation under the
Investment Company Act. If we are required to re-classify our assets, we
may no longer be in compliance with the exclusion from the definition of an
“investment company” provided by Section 3(c)(5)(C) of the Investment Company
Act.
To
maintain compliance with the Investment Company Act exemption, we may be unable
to sell assets we would otherwise want to sell and may need to sell assets we
would otherwise wish to retain. In addition, we may have to acquire
additional income or loss generating assets that we might not otherwise have
acquired or may have to forgo opportunities to acquire interests in companies
that we would otherwise want to acquire and would be important to our investment
strategy. If we were required to register as an investment company but
failed to do so, we would be prohibited from engaging in our business, and
criminal and civil actions could be brought against us. In addition, our
contracts would be unenforceable unless a court were to require enforcement, and
a court could appoint a receiver to take control of us and liquidate our
business.
You
are bound by the majority vote on matters on which you are entitled to vote, and
therefore, your vote on a particular matter may be superseded by the vote of
others.
You may
vote on certain matters at any annual or special meeting of stockholders,
including the election of directors. However, you will be bound by the
majority vote on matters requiring approval of a majority of the stockholders
even if you do not vote with the majority on any such matter.
If
you do not agree with the decisions of our board of directors, you only have
limited control over changes in our policies and operations and may not be able
to change such policies and operations.
Our board
of directors determines our major policies, including our policies regarding
investments, financing, growth, debt capitalization, REIT qualification and
distributions. Our board of directors may amend or revise these and other
policies without a vote of the stockholders. Under the Maryland General
Corporation Law and our charter, our stockholders have a right to vote only on
the following:
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the
election or removal of directors;
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amendments
of our charter (including a change in our investment objectives), except
certain amendments that do not adversely affect the rights, preferences
and privileges of our stockholders;
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our
liquidation or dissolution;
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a
reorganization of our company, as provided in our charter;
and
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mergers,
consolidations or sales or other dispositions of substantially all of our
assets, as provided in our charter.
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All other
matters are subject to the discretion of our board of directors.
Our
board of directors may change our investment policies without stockholder
approval, which could alter the nature of your investments.
Our
charter requires that our independent directors review our investment policies
at least annually to determine that the policies we are following are in the
best interest of the stockholders. These policies may change over
time. The methods of implementing our investment policies may also vary,
as new real estate development trends emerge and new investment techniques are
developed. Our investment policies, the methods for their implementation,
and our other objectives, policies and procedures may be altered by our board of
directors without the approval of our stockholders. As a result, the
nature of your investment could change without your consent.
You
are limited in your ability to sell your shares pursuant to our share repurchase
program and may have to hold your shares for an indefinite period of
time.
Our board
of directors may amend the terms of our share repurchase program without
stockholder approval. Our board of directors also is free to suspend or
terminate the program upon 30 days notice or to reject any request for
repurchase. In addition, the share repurchase program includes numerous
restrictions that would limit your ability to sell your shares. Generally,
you must have held your shares for at least one year in order to participate in
our share repurchase program. If our board of directors authorizes a
repurchase from legally available funds, we will limit the number of shares
repurchased pursuant to our share repurchase program as follows: (a)
during any calendar year, the number of shares we will redeem will be limited to
the proceeds in the initial offering’s distribution reinvestment plan (shares
requested for repurchase upon the death of a stockholder will not be subject to
this limitation); and (b) funding for the repurchase of shares will be limited
to the net proceeds we receive from the sale of shares under our initial
offering’s distribution reinvestment plan. These limits might prevent us
from accommodating all repurchase requests made in any year. See the
“Description of Shares — Share Repurchase Program” section of this prospectus
for more information about the share repurchase program. These
restrictions severely limit your ability to sell your shares should you require
liquidity, and limit your ability to recover the value you invested or the fair
market value of your shares.
We
established the offering price on an arbitrary basis; as a result, the actual
value of your investment may be substantially less than what you
pay.
Our board
of directors has arbitrarily determined the selling price of the shares
consistent with our initial offering and comparable real estate investment
programs in the market, and such price bears no relationship to our book or
asset values, or to any other established criteria for valuing issued or
outstanding shares. Because the offering price is not based upon any
independent valuation, the offering price is not indicative of the proceeds that
you would receive upon liquidation.
Because
the dealer manager is one of our affiliates, you will not have the benefit of an
independent review of the prospectus or us customarily performed in underwritten
offerings.
The
dealer manager, Realty Capital Securities, LLC, is one of our affiliates and
will not make an independent review of us or the offering. Accordingly,
you will have to rely on your own broker-dealer to make an independent review of
the terms of this offering. If your broker-dealer does not conduct such a
review, you will not have the benefit of an independent review of the terms of
this offering. Further, the due diligence investigation of us by the
dealer manager cannot be considered to be an independent review and, therefore,
may not be as meaningful as a review conducted by an unaffiliated broker-dealer
or investment banker.
Your
interest in us will be diluted if we issue or offer additional
shares.
Existing
stockholders and potential investors in the initial offering and this follow-on
offering do not have preemptive rights to any shares issued by us in the
future. Our charter currently authorizes us to issue up to 250,000,000
shares of stock, of which 240,000,000 shares are designated as common stock and
10,000,000 are designated as preferred stock.
Subject
to any limitations set forth under Maryland law, our board of directors may
increase the number of authorized shares of stock, increase or decrease the
number of shares of any class or series of stock designated, or reclassify any
unissued shares without the necessity of obtaining stockholder approval.
All of such shares may be issued in the discretion of our board of
directors. Existing stockholders and investors purchasing shares in this
offering likely will suffer dilution of their equity investment in us, in the
event that we (a) sell shares in this offering or sell additional shares in the
future, including those issued pursuant to follow-on offerings or our initial
offering’s distribution reinvestment plan, (b) sell securities that are
convertible into shares of our common stock, (c) issue shares of our common
stock in a private offering of securities to institutional investors, (d) issue
shares of our common stock upon the exercise of the options granted to our
independent directors, (e) issue shares to our advisor, its successors or
assigns, in payment of an outstanding fee obligation as set forth under our
advisory agreement, or (f) issue shares of our common stock to sellers of
properties acquired by us in connection with an exchange of limited partnership
interests of American Realty Capital Operating Partnership, L.P., existing
stockholders and investors purchasing shares in this offering will likely
experience dilution of their equity investment in us. In addition, the
partnership agreement for American Realty Capital Operating Partnership, L.P.
contains provisions that would allow, under certain circumstances, other
entities, including other American Realty Capital-sponsored programs, to merge
into or cause the exchange or conversion of their interest for interests of
American Realty Capital Operating Partnership, L.P. Because the limited
partnership units of American Realty Capital Operating Partnership, L.P. may, in
the discretion of our board of directors, be exchanged for shares of our common
stock, any merger, exchange or conversion between American Realty Capital
Operating Partnership, L.P. and another entity ultimately could result in the
issuance of a substantial number of shares of our common stock, thereby diluting
the percentage ownership interest of other stockholders. To the extent we
issue additional equity interests after you purchase shares of our common stock
in this offering, your percentage ownership interest in us will be
diluted. In addition, depending upon the terms and pricing of any
additional offerings and the value of our real properties and other real
estate-related assets, you may also experience dilution in the book value and
fair market value of your shares. Because of these and other reasons
described in this “Risk Factors” section, you should not expect to be able to
own a significant percentage of our shares.
Payment
of fees to American Realty Capital Advisors, LLC and its affiliates reduces cash
available for investment and distribution.
American
Realty Capital Advisors, LLC and its affiliates will perform services for us in
connection with the offer and sale of the shares, the selection and acquisition
of our investments, and the management and leasing of our properties, the
servicing of our mortgage, bridge or mezzanine loans, if any, and the
administration of our other investments. They are paid substantial fees
for these services, which reduces the amount of cash available for investment in
properties or distribution to stockholders. For a more detailed discussion
of the fees payable to such entities in respect of this offering, see the
“Management Compensation” section of this prospectus.
We
may be unable to pay or maintain cash distributions or increase distributions
over time.
There are
many factors that can affect the availability and timing of cash distributions
to stockholders. Distributions will be based principally on cash available
from our operations. The amount of cash available for distributions is
affected by many factors, such as our ability to buy properties as offering
proceeds become available, rental income from such properties, and our operating
expense levels, as well as many other variables. Actual cash available for
distributions may vary substantially from estimates. We cannot assure you
that we will be able to pay or maintain our current anticipated level of
distributions or that distributions will increase over time. We cannot
give any assurance that rents from the properties will increase, that the
securities we buy will increase in value or provide constant or increased
distributions over time, or that future acquisitions of real properties,
mortgage, bridge or mezzanine loans or any investments in securities will
increase our cash available for distributions to stockholders. Our actual
results may differ significantly from the assumptions used by our board of
directors in establishing the distribution rate to stockholders. We may
not have sufficient legally available cash from operations to make a
distribution required to qualify for or maintain our REIT status. We may
increase borrowing or use proceeds from this offering to make distributions,
each of which could be deemed to be a return of your capital. We may make
distributions from the proceeds of this offering or from borrowings in
anticipation of future cash flow. Any such distributions will constitute a
return of capital and may reduce the amount of capital we ultimately invest in
properties and negatively impact the value of your investment. For a
description of the factors that can affect the availability and timing of cash
distributions to stockholders, see the section of this prospectus captioned
“Description of Shares — Distributions Policy.”
We
will not calculate the net asset value per share for our shares until 18 months
after completion of our last offering, therefore, you will not be able to
determine the net asset value of your shares on an on-going basis during this
offering and for a substantial period of time thereafter.
Until 18
months after the termination of this follow-on offering or the termination of
any subsequent offering of our shares, we intend to use the offering price of
shares in our most recent offering as the per share value (unless we have made a
special distribution to stockholders of net sales proceeds from the sale of one
or more properties prior to the date of determination of the per share value, in
which case we will use the offering price less the per share amount of the
special distribution). Beginning 18 months after the completion of the
last offering of our shares, our board of directors will determine the value of
our properties and our other assets based on such information as our board
determines appropriate, which may or may not include independent valuations of
our properties or of our enterprise as a whole. We will disclose this net
asset value to stockholders in our filings with the SEC. Therefore, you
will not be able to determine the net asset value of your shares on an on-going
basis during this offering. See “Investment by Tax-Exempt Entities and
ERISA Considerations —Annual or More Frequent Valuation
Requirement.”
General
Risks Related to Investments in Real Estate
Our
operating results will be affected by economic and regulatory changes that have
an adverse impact on the real estate market in general, and we cannot assure you
that we will be profitable or that we will realize growth in the value of our
real estate properties.
Our
operating results are subject to risks generally incident to the ownership of
real estate, including:
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changes
in general economic or local
conditions;
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changes
in supply of or demand for similar or competing properties in an
area;
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changes
in interest rates and availability of permanent mortgage funds that may
render the sale of a property difficult or
unattractive;
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changes
in tax, real estate, environmental and zoning
laws;
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changes
in insurance costs; and
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periods
of high interest rates and tight money
supply.
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These and
other reasons may prevent us from being profitable or from realizing growth or
maintaining the value of our real estate properties.
Many
of our properties will depend upon a single tenant for all or a majority of
their rental income, and our financial condition and ability to make
distributions may be adversely affected by the bankruptcy or insolvency, a
downturn in the business, or a lease termination of a single
tenant.
We expect
that many of our properties will be occupied by only one tenant or will derive a
majority of their rental income from one tenant and, therefore, the success of
those properties will be materially dependent on the financial stability of such
tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions we pay. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and force us
to find an alternative source of revenue to meet any mortgage payment and
prevent a foreclosure if the property is subject to a mortgage. In the
event of a default, we may experience delays in enforcing our rights as landlord
and may incur substantial costs in protecting our investment and re-letting the
property. If a lease is terminated, there is no assurance that we will be
able to lease the property for the rent previously received or sell the property
without incurring a loss. A default by a tenant, the failure of a
guarantor to fulfill its obligations or other premature termination of a lease,
or a tenant’s election not to extend a lease upon its expiration, could have an
adverse effect on our financial condition and our ability to pay
distributions.
If
a tenant declares bankruptcy, we may be unable to collect balances due under
relevant leases.
Any of
our tenants, or any guarantor of a tenant’s lease obligations, could be subject
to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the
United States. Such a bankruptcy filing would bar all efforts by us to
collect pre-bankruptcy debts from these entities or their properties, unless we
receive an enabling order from the bankruptcy court. Post-bankruptcy debts
would be paid currently. If a lease is assumed, all pre-bankruptcy
balances owing under it must be paid in full. If a lease is rejected by a
tenant in bankruptcy, we would have a general unsecured claim for damages.
If a lease is rejected, it is unlikely we would receive any payments from the
tenant because our claim is capped at the rent reserved under the lease, without
acceleration, for the greater of one year or 15% of the remaining term of the
lease, but not greater than three years, plus rent already due but unpaid.
This claim could be paid only in the event funds were available, and then only
in the same percentage as that realized on other unsecured claims.
A tenant
or lease guarantor bankruptcy could delay efforts to collect past due balances
under the relevant leases, and could ultimately preclude full collection of
these sums. Such an event could cause a decrease or cessation of rental
payments that would mean a reduction in our cash flow and the amount available
for distributions to you. In the event of a bankruptcy, we cannot assure
you that the tenant or its trustee will assume our lease. If a given
lease, or guaranty of a lease, is not assumed, our cash flow and the amounts
available for distributions to you may be adversely affected.
A
high concentration of our properties in a particular geographic area, or that
have tenants in a similar industry, would magnify the effects of downturns in
that geographic area or industry.
We expect
that our properties will be diverse according to geographic area and industry of
our tenants. However, in the event that we have a concentration of
properties in any particular geographic area, any adverse situation that
disproportionately affects that geographic area would have a magnified adverse
effect on our portfolio. Similarly, if our tenants are concentrated in a
certain industry or industries, any adverse effect to that industry generally
would have a disproportionately adverse effect on our portfolio.
If
a sale-leaseback transaction is recharacterized in a tenant’s bankruptcy
proceeding, our financial condition could be adversely affected.
We may
enter into sale-leaseback transactions, whereby we would purchase a property and
then lease the same property back to the person from whom we purchased it.
In the event of the bankruptcy of a tenant, a transaction structured as a
sale-leaseback may be recharacterized as either a financing or a joint venture,
either of which outcomes could adversely affect our business. If the
sale-leaseback were recharacterized as a financing, we might not be considered
the owner of the property, and as a result would have the status of a creditor
in relation to the tenant. In that event, we would no longer have the
right to sell or encumber our ownership interest in the property. Instead,
we would have a claim against the tenant for the amounts owed under the lease,
with the claim arguably secured by the property. The tenant/debtor might
have the ability to propose a plan restructuring the term, interest rate and
amortization schedule of its outstanding balance. If confirmed by the
bankruptcy court, we could be bound by the new terms, and prevented from
foreclosing our lien on the property. If the sale-leaseback were
recharacterized as a joint venture, our lessee and we could be treated as
co-venturers with regard to the property. As a result, we could be held
liable, under some circumstances, for debts incurred by the lessee relating to
the property. Either of these outcomes could adversely affect our cash
flow and the amount available for distributions to you.
Properties
that have vacancies for a significant period of time could be difficult to sell,
which could diminish the return on your investment.
A
property may incur vacancies either by the continued default of tenants under
their leases or the expiration of tenant leases. If vacancies continue for
a long period of time, we will suffer reduced revenues which may result in less
cash to be distributed to stockholders. In addition, because properties’
market values depend principally upon the value of the properties’ leases, the
resale value of properties with prolonged vacancies could suffer, which could
further reduce your return.
We
may obtain only limited warranties when we purchase a property and would have
only limited recourse in the event our due diligence did not identify any issues
that lower the value of our property.
The
seller of a property often sells such property in its “as is” condition on a
“where is” basis and “with all faults,” without any warranties of
merchantability or fitness for a particular use or purpose. In addition,
purchase agreements may contain only limited warranties, representations and
indemnifications that will only survive for a limited period after the
closing. The purchase of properties with limited warranties increases the
risk that we may lose some or all of our invested capital in the property as
well as the loss of rental income from that property.
We
may be unable to secure funds for future tenant improvements or capital needs,
which could adversely impact our ability to pay cash distributions to our
stockholders.
When
tenants do not renew their leases or otherwise vacate their space, it is usual
that, in order to attract replacement tenants, we will be required to expend
substantial funds for tenant improvements and tenant refurbishments to the
vacated space. In addition, although we expect that our leases with
tenants will require tenants to pay routine property maintenance costs, we will
likely be responsible for any major structural repairs, such as repairs to the
foundation, exterior walls and rooftops. We will use substantially all of
this offering’s gross proceeds to buy real estate and pay various fees and
expenses. We intend to reserve only 0.1% of the gross proceeds from this
offering for future capital needs. Accordingly, if we need additional
capital in the future to improve or maintain our properties or for any other
reason, we will have to obtain financing from other sources, such as cash flow
from operations, borrowings, property sales or future equity offerings.
These sources of funding may not be available on attractive terms or at
all. If we cannot procure additional funding for capital improvements, our
investments may generate lower cash flows or decline in value, or
both.
Our
inability to sell a property when we desire to do so could adversely impact our
ability to pay cash distributions to you.
The real
estate market is affected by many factors, such as general economic conditions,
availability of financing, interest rates and other factors, including supply
and demand, that are beyond our control. We cannot predict whether we will
be able to sell any property for the price or on the terms set by us, or whether
any price or other terms offered by a prospective purchaser would be acceptable
to us. We cannot predict the length of time needed to find a willing
purchaser and to close the sale of a property.
We may be
required to expend funds to correct defects or to make improvements before a
property can be sold. We cannot assure you that we will have funds
available to correct such defects or to make such improvements. Moreover,
in acquiring a property, we may agree to restrictions that prohibit the sale of
that property for a period of time or impose other restrictions, such as a
limitation on the amount of debt that can be placed or repaid on that
property. These provisions would restrict our ability to sell a
property.
We
may not be able to sell our properties at a price equal to, or greater than, the
price for which we purchased such property, which may lead to a decrease in the
value of our assets.
Many of
our leases will not contain rental increases over time. Therefore, the
value of the property to a potential purchaser may not increase over time, which
may restrict our ability to sell a property, or in the event we are able to sell
such property, may lead to a sale price less than the price that we paid to
purchase the property.
We
may acquire or finance properties with lock-out provisions, which may prohibit
us from selling a property, or may require us to maintain specified debt levels
for a period of years on some properties.
Lock-out
provisions, which preclude pre-payments of a loan, could materially restrict us
from selling or otherwise disposing of or refinancing properties. These
provisions would affect our ability to turn our investments into cash and thus
affect cash available for distributions to you. Lock out provisions may
prohibit us from reducing the outstanding indebtedness with respect to any
properties, refinancing such indebtedness on a non-recourse basis at maturity,
or increasing the amount of indebtedness with respect to such properties.
Lock-out provisions could impair our ability to take other actions during the
lock-out period that could be in the best interests of our stockholders and,
therefore, may have an adverse impact on the value of the shares, relative to
the value that would result if the lock-out provisions did not exist. In
particular, lock-out provisions could preclude us from participating in major
transactions that could result in a disposition of our assets or a change in
control even though that disposition or change in control might be in the best
interests of our stockholders.
Rising
expenses could reduce cash flow and funds available for future
acquisitions.
Any
properties that we buy in the future will be, subject to operating risks common
to real estate in general, any or all of which may negatively affect us.
If any property is not fully occupied or if rents are being paid in an amount
that is insufficient to cover operating expenses, we could be required to expend
funds with respect to that property for operating expenses. The properties
will be subject to increases in tax rates, utility costs, operating expenses,
insurance costs, repairs and maintenance and administrative expenses.
While we expect that many of our properties will be leased on a triple-net-lease
basis or will require the tenants to pay all or a portion of such expenses,
renewals of leases or future leases may not be negotiated on that basis, in
which event we may have to pay those costs. If we are unable to lease
properties on a triple-net-lease basis or on a basis requiring the tenants to
pay all or some of such expenses, or if tenants fail to pay required tax,
utility and other impositions, we could be required to pay those costs which
could adversely affect funds available for future acquisitions or cash available
for distributions.
Adverse
economic conditions will negatively affect our returns and
profitability.
Recent
events have exacerbated the general economic slowdown that has affected the
nation as a whole and the local economies where our properties may be located.
Economic weakness and higher unemployment, combined with higher costs,
especially for energy, food and commodities, has put considerable pressure on
consumer spending, which, along with the lack of available debt financing, has
resulted in many U.S. companies experiencing poorer financial and operating
performance over the past twelve months than in prior periods. As a result, this
slowdown has reduced demand for space and removed support for rents and property
values. Our operating results may be affected by the following market and
economic challenges, which may result from a continued or exacerbated general
economic slow down experienced by the nation as a whole or by the local
economics where our properties may be located:
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poor
economic conditions may result in tenant defaults under
leases;
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re-leasing
may require concessions or reduced rental rates under the new
leases;
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constricted
access to credit may result in tenant defaults or non-renewals under
leases; and
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increased
insurance premiums may reduce funds available for distribution or, to the
extent such increases are passed through to tenants, may lead to tenant
defaults. Increased insurance premiums may make it difficult to
increase rents to tenants on turnover, which may adversely affect our
ability to increase our returns.
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continuing environment of declining prices could further weaken real estate
markets. We do not know how long the slowdown will last, or when, or even if,
real estate markets will return to more normal conditions. Since we cannot
predict when real estate markets may recover, the value of our properties may
decline if market conditions persist or worsen. Further, the results of
operations for a property in any one period may not be indicative of results in
future periods, and the long-term performance of such property generally may not
be comparable to, and cash flows may not be as predictable as, other properties
owned by third parties in the same or similar industry. The already weak
conditions in the real estate markets could be further exacerbated by a
deterioration of national or regional economic conditions. Our property values
and operations could be negatively affected to the extent that the current
economic downturn is prolonged or becomes more severe.
If
we suffer losses that are not covered by insurance or that are in excess of
insurance coverage, we could lose invested capital and anticipated
profits.
Generally,
each of our tenants will be responsible for insuring its goods and premises and,
in some circumstances, may be required to reimburse us for a share of the cost
of acquiring comprehensive insurance for the property, including casualty,
liability, fire and extended coverage customarily obtained for similar
properties in amounts that our advisor determines are sufficient to cover
reasonably foreseeable losses. Tenants of single-user properties leased on
a triple-net-lease basis typically are required to pay all insurance costs
associated with those properties. Material losses may occur in excess of
insurance proceeds with respect to any property, as insurance may not be
sufficient to fund the losses. However, there are types of losses,
generally of a catastrophic nature, such as losses due to wars, acts of
terrorism, earthquakes, floods, hurricanes, pollution or environmental matters,
which are either uninsurable or not economically insurable, or may be insured
subject to limitations, such as large deductibles or co-payments.
Insurance risks associated with potential terrorism acts could sharply increase
the premiums we pay for coverage against property and casualty claims.
Additionally, mortgage lenders in some cases have begun to insist that
commercial property owners purchase specific coverage against terrorism as a
condition for providing mortgage loans. It is uncertain whether such
insurance policies will be available, or available at reasonable cost, which
could inhibit our ability to finance or refinance our potential
properties. In these instances, we may be required to provide other
financial support, either through financial assurances or self-insurance, to
cover potential losses. We may not have adequate, or any, coverage for
such losses. The Terrorism Risk Insurance Act of 2002 is designed for a
sharing of terrorism losses between insurance companies and the federal
government, and has been renewed until December 31, 2014. We cannot be
certain how this act will impact us or what additional cost to us, if any, could
result. If such an event damaged or destroyed one or more of our
properties, we could lose both our invested capital and anticipated profits from
such property.
Real
estate-related taxes may increase and if these increases are not passed on to
tenants, our income will be reduced.
Some
local real property tax assessors may seek to reassess some of our properties as
a result of our acquisition of the property. Generally, from time to time
our property taxes increase as property values or assessment rates change or for
other reasons deemed relevant by the assessors. An increase in the
assessed valuation of a property for real estate tax purposes will result in an
increase in the related real estate taxes on that property. Although some
tenant leases may permit us to pass through such tax increases to the tenants
for payment, there is no assurance that renewal leases or future leases will be
negotiated on the same basis. Increases not passed through to tenants will
adversely affect our income, cash available for distributions, and the amount of
distributions to you.
CC&Rs
may restrict our ability to operate a property.
Some of
our properties are contiguous to other parcels of real property, comprising part
of the same commercial center. In connection with such properties, there
are significant covenants, conditions and restrictions, known as “CC&Rs,”
restricting the operation of such properties and any improvements on such
properties, and related to granting easements on such properties.
Moreover, the operation and management of the contiguous properties may impact
such properties. Compliance with CC&Rs may adversely affect our
operating costs and reduce the amount of funds that we have available to pay
distributions.
Our
operating results may be negatively affected by potential development and
construction delays and resultant increased costs and risks.
While we
do not currently intend to do so, we may use proceeds from this offering to
acquire and develop properties upon which we will construct improvements.
We will be subject to uncertainties associated with re-zoning for development,
environmental concerns of governmental entities and/or community groups, and our
builder’s ability to build in conformity with plans, specifications, budgeted
costs, and timetables. If a builder fails to perform, we may resort to
legal action to rescind the purchase or the construction contract or to compel
performance. A builder’s performance may also be affected or delayed by
conditions beyond the builder’s control. Delays in completion of
construction could also give tenants the right to terminate preconstruction
leases. We may incur additional risks when we make periodic progress
payments or other advances to builders before they complete construction.
These and other such factors can result in increased costs of a project or loss
of our investment. In addition, we will be subject to normal lease-up
risks relating to newly constructed projects. We also must rely on rental
income and expense projections and estimates of the fair market value of
property upon completion of construction when agreeing upon a price at the time
we acquire the property. If our projections are inaccurate, we may pay too
much for a property, and our return on our investment could suffer.
While we
do not currently intend to do so, we may invest in unimproved real
property. Returns from development of unimproved properties are also
subject to risks associated with re-zoning the land for development and
environmental concerns of governmental entities and/or community groups.
Although we intend to limit any investment in unimproved property to property we
intend to develop, your investment nevertheless is subject to the risks
associated with investments in unimproved real property.
If
we contract with an affiliated development company for newly developed property,
we cannot guarantee that our earnest money deposit made to the development
company will be fully refunded.
While we
currently do not have an affiliated development company, our sponsor and/or its
affiliates may form a development company. In such an event, we may enter
into one or more contracts, either directly or indirectly through joint ventures
with affiliates or others, to acquire real property from an affiliate of
American Realty Capital Advisors, LLC that is engaged in construction and
development of commercial real properties. Properties acquired from an
affiliated development company may be either existing income-producing
properties, properties to be developed or properties under development. We
anticipate that we will be obligated to pay a substantial earnest money deposit
at the time of contracting to acquire such properties. In the case of
properties to be developed by an affiliated development company, we anticipate
that we will be required to close the purchase of the property upon completion
of the development of the property by our affiliate. At the time of
contracting and the payment of the earnest money deposit by us, our development
company affiliate typically will not have acquired title to any real
property. Typically, our development company affiliate will only have a
contract to acquire land, a development agreement to develop a building on the
land and an agreement with one or more tenants to lease all or part of the
property upon its completion. We may enter into such a contract with our
development company affiliate even if at the time of contracting we have not yet
raised sufficient proceeds in our offering to enable us to close the purchase of
such property. However, we will not be required to close a purchase from
our development company affiliate, and will be entitled to a refund of our
earnest money, in the following circumstances:
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our
development company affiliate fails to develop the
property;
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all
or a specified portion of the pre-leased tenants fail to take possession
under their leases for any reason;
or
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we
are unable to raise sufficient proceeds from our offering to pay the
purchase price at closing.
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The
obligation of our development company affiliate to refund our earnest money will
be unsecured, and no assurance can be made that we would be able to obtain a
refund of such earnest money deposit from it under these circumstances since our
development company affiliate may be an entity without substantial assets or
operations. However, our development company affiliate’s obligation to
refund our earnest money deposit may be guaranteed by American Realty Capital
Properties, LLC, our property manager, which will enter into contracts to
provide property management and leasing services to various American Realty
Capital-sponsored programs, including us, for substantial monthly fees. As
of the time American Realty Capital Properties, LLC may be required to perform
under any guaranty, we cannot assure that American Realty Capital Properties,
LLC will have sufficient assets to refund all of our earnest money deposit in a
lump sum payment. If we were forced to collect our earnest money deposit
by enforcing the guaranty of American Realty Capital Properties, LLC, we will
likely be required to accept installment payments over time payable out of the
revenues of American Realty Capital Properties, LLC operations. We cannot
assure you that we would be able to collect the entire amount of our earnest
money deposit under such circumstances. See “Investment Objectives and
Policies —Acquisition and Investment Policies.”
Competition
with third parties in acquiring properties and other investments may reduce our
profitability and the return on your investment.
We
compete with many other entities engaged in real estate investment activities,
including individuals, corporations, bank and insurance company investment
accounts, other REITs, real estate limited partnerships, and other entities
engaged in real estate investment activities, many of which have greater
resources than we do. Larger REITs may enjoy significant competitive
advantages that result from, among other things, a lower cost of capital and
enhanced operating efficiencies. In addition, the number of entities and
the amount of funds competing for suitable investments may increase. Any
such increase would result in increased demand for these assets and therefore
increased prices paid for them. If we pay higher prices for properties and
other investments, our profitability will be reduced and you may experience a
lower return on your investment.
Our
properties face competition that may affect tenants’ ability to pay rent and the
amount of rent paid to us may affect the cash available for distributions and
the amount of distributions.
Our
properties typically are, and we expect will be, located in developed
areas. Therefore, there are and will be numerous other properties within
the market area of each of our properties that will compete with us for
tenants. The number of competitive properties could have a material effect
on our ability to rent space at our properties and the amount of rents
charged. We could be adversely affected if additional competitive
properties are built in locations competitive with our properties, causing
increased competition for customer traffic and creditworthy tenants. This
could result in decreased cash flow from tenants and may require us to make
capital improvements to properties that we would not have otherwise made, thus
affecting cash available for distributions, and the amount available for
distributions to you.
Delays
in acquisitions of properties may an have adverse effect on your
investment.
There may
be a substantial period of time before the proceeds of this offering are
invested. Delays we encounter in the selection, acquisition and/or
development of properties could adversely affect your returns. Where
properties are acquired prior to the start of construction or during the early
stages of construction, it will typically take several months to complete
construction and rent available space. Therefore, you could suffer delays
in the payment of cash distributions attributable to those particular
properties.
Costs
of complying with governmental laws and regulations, including those relating to
environmental matters, may adversely affect our income and the cash available
for any distributions.
All real
property and the operations conducted on real property are subject to federal,
state and local laws and regulations relating to environmental protection and
human health and safety. These laws and regulations generally govern
wastewater discharges, air emissions, the operation and removal of underground
and above-ground storage tanks, the use, storage, treatment, transportation and
disposal of solid and hazardous materials, and the remediation of contamination
associated with disposals. Environmental laws and regulations may impose
joint and several liability on tenants, owners or operators for the costs to
investigate or remediate contaminated properties, regardless of fault or whether
the acts causing the contamination were legal. This liability could be
substantial. In addition, the presence of hazardous substances, or the
failure to properly remediate these substances, may adversely affect our ability
to sell, rent or pledge such property as collateral for future
borrowings.
Some of
these laws and regulations have been amended so as to require compliance with
new or more stringent standards as of future dates. Compliance with new or
more stringent laws or regulations or stricter interpretation of existing laws
may require material expenditures by us. Future laws, ordinances or
regulations may impose material environmental liability. Additionally, our
tenants’ operations, the existing condition of land when we buy it, operations
in the vicinity of our properties, such as the presence of underground storage
tanks, or activities of unrelated third parties may affect our properties.
In addition, there are various local, state and federal fire, health,
life-safety and similar regulations with which we may be required to comply, and
that may subject us to liability in the form of fines or damages for
noncompliance. Any material expenditures, fines, or damages we must pay
will reduce our ability to make distributions and may reduce the value of your
investment.
State and
federal laws in this area are constantly evolving, and we intend to monitor
these laws and take commercially reasonable steps to protect ourselves from the
impact of these laws, including obtaining environmental assessments of most
properties that we acquire; however, we will not obtain an independent
third-party environmental assessment for every property we acquire. In
addition, any such assessment that we do obtain may not reveal all environmental
liabilities or that a prior owner of a property did not create a material
environmental condition not known to us. The cost of defending against
claims of liability, of compliance with environmental regulatory requirements,
of remediating any contaminated property, or of paying personal injury claims
would materially adversely affect our business, assets or results of operations
and, consequently, amounts available for distribution to you. See
“Investment Objectives and Policies — Environmental Matters.”
If
we sell properties by providing financing to purchasers, defaults by the
purchasers would adversely affect our cash flows.
If we
decide to sell any of our properties, we intend to use our best efforts to sell
them for cash. However, in some instances we may sell our properties by
providing financing to purchasers. When we provide financing to
purchasers, we will bear the risk that the purchaser may default, which could
negatively impact our cash distributions to stockholders. Even in the
absence of a purchaser default, the distribution of the proceeds of sales to our
stockholders, or their reinvestment in other assets, will be delayed until the
promissory notes or other property we may accept upon the sale are actually
paid, sold, refinanced or otherwise disposed of. In some cases, we may
receive initial down payments in cash and other property in the year of sale in
an amount less than the selling price and subsequent payments will be spread
over a number of years. If any purchaser defaults under a financing
arrangement with us, it could negatively impact our ability to pay cash
distributions to our stockholders.
Our
recovery of an investment in a mortgage, bridge or mezzanine loan that has
defaulted may be limited
There is
no guarantee that the mortgage, loan or deed of trust securing an investment
will, following a default, permit us to recover the original investment and
interest that would have been received absent a default. The security
provided by a mortgage, deed of trust or loan is directly related to the
difference between the amount owed and the appraised market value of the
property. Although we intend to rely on a current real estate appraisal
when we make the investment, the value of the property is affected by factors
outside our control, including general fluctuations in the real estate market,
rezoning, neighborhood changes, highway relocations and failure by the borrower
to maintain the property. In addition, we may incur the costs of
litigation in our efforts to enforce our rights under defaulted
loans.
Our
costs associated with complying with the Americans with Disabilities Act may
affect cash available for distributions.
Our
properties will be subject to the Americans with Disabilities Act of 1990 (the
“Disabilities Act”). Under the Disabilities Act, all places of public
accommodation are required to comply with federal requirements related to access
and use by disabled persons. The Disabilities Act has separate compliance
requirements for “public accommodations” and “commercial facilities” that
generally require that buildings and services, including restaurants and retail
stores, be made accessible and available to people with disabilities. The
Disabilities Act’s requirements could require removal of access barriers and
could result in the imposition of injunctive relief, monetary penalties, or, in
some cases, an award of damages. We will attempt to acquire properties
that comply with the Disabilities Act or place the burden on the seller or other
third party, such as a tenant, to ensure compliance with the Disabilities
Act. However, we cannot assure you that we will be able to acquire
properties or allocate responsibilities in this manner. If we cannot, our
funds used for Disabilities Act compliance may affect cash available for
distributions and the amount of distributions to you.
Economic
conditions may adversely affect our income.
The
global financial markets have undergone a fundamental down-turn since mid-2007,
which has had an adverse impact on the availability of credit to businesses
generally. To the extent that the global economic recession continues and/or,
intensifies, it has the potential to materially affect our operating results and
financial condition, the value of our properties and other investments we make,
the availability or the terms of financing that we may anticipate utilizing, and
our ability to make principal and interest payments on, or refinance, any
outstanding debt when due, and/or, for our leased properties, the ability of our
tenants to enter into new leasing transactions or satisfy rental payments under
existing leases as follows:
• Debt Markets — The debt markets are currently experiencing
volatility as a result of certain factors, including the tightening of
underwriting standards by lenders and credit rating agencies. Should overall
borrowing costs increase, our operations may generate lower returns. The amount
of capital that is available to finance real estate has decreased, which: (1)
limits the ability of real estate investors to make new acquisitions and to
benefit from reduced real estate values or to realize enhanced returns on real
estate investments; (2) has slowed real estate transaction activity; and (3) may
result in an inability to refinance debt. All of these developments may
result in price or value decreases of real estate assets and impact our ability
to raise equity capital.
• Real Estate Markets — The recent global economic recession has
caused commercial real estate values to decline substantially. As a result,
there may be uncertainty in the valuation, or in the stability of the value, of
the properties we acquire that could result in a substantial decrease in the
value of our properties after we purchase them. Consequently, we may not be able
to recover the carrying amount of our properties, which may require us to
recognize an impairment charge or record a loss on sale in
earnings.
• Government Intervention — The disruptions in the global financial
markets have led to extensive and unprecedented government intervention, which
is intended to stimulate the flow of capital and to strengthen the U.S. economy
in the short term. We cannot predict the actual effect of the government
intervention and what effect, if any, additional governmental intervention may
have on the financial markets and/or on us.
Our
success may be hampered by the current slow down in the real estate
industry.
Our
business is sensitive to trends in the general economy, as well as the
commercial real estate and credit markets. The current macroeconomic
environment and accompanying credit crisis has negatively impacted the value of
commercial real estate assets, contributing to a general slow down in our
industry, which may continue through 2010 and beyond. A prolonged and
pronounced recession could continue or accelerate the reduction in overall
transaction volume and size of sales and leasing activities that we have already
experienced, and would continue to put downward pressure on our revenues and
operating results. To the extent that any decline in our revenues and
operating results impacts our performance, our results of operations, financial
condition and ability to pay distributions to our stockholders could also
suffer.
Adverse
geopolitical conditions may negatively affect our returns and
profitability.
The
United States’ armed conflict in various parts of the world could have a further
impact on our tenants. The consequences of any armed conflict are unpredictable,
and we may not be able to foresee events that could have an adverse effect on
our business or your investment. More generally, any of these events could
result in increased volatility in or damage to the United States and worldwide
financial markets and economy. They also could result in higher energy costs and
increased economic uncertainty in the United States or abroad. Our revenues will
be dependent upon payment of rent by retailers, which may be particularly
vulnerable to uncertainty in the local economy. Adverse economic conditions
could affect the ability of our tenants to pay rent, which could have a material
adverse effect on our operating results and financial condition, as well as our
ability to pay distributions to you.
Net
leases may not result in fair market lease rates over time.
We expect
a large portion of our rental income to come from net leases, which generally
provide the tenant greater discretion in using the leased property than ordinary
property leases, such as the right to freely sublease the property, to make
alterations in the leased premises and to terminate the lease prior to its
expiration under specified circumstances. Furthermore, net leases
typically have longer lease terms and, thus, there is an increased risk that
contractual rental increases in future years will fail to result in fair market
rental rates during those years. As a result, our income and distributions
to our stockholders could be lower than they would otherwise be if we did not
engage in net leases.
Our
real estate investments may include special use single tenant properties that
may be difficult to sell or re-lease upon tenant defaults or early lease
terminations.
We focus
our investments on commercial and industrial properties, including special use
single tenant properties. These types of properties are relatively
illiquid compared to other types of real estate and financial assets. This
illiquidity will limit our ability to quickly change our portfolio in response
to changes in economic or other conditions. With these properties, if the
current lease is terminated or not renewed or, in the case of a mortgage loan,
if we take such property in foreclosure, we may be required to renovate the
property or to make rent concessions in order to lease the property to another
tenant or sell the property. In addition, in the event we are forced to
sell the property, we may have difficulty selling it to a party other than the
tenant or borrower due to the special purpose for which the property may have
been designed. These and other limitations may affect our ability to sell
or re-lease properties and adversely affect returns to you.
Risks
Associated with Debt Financing
We
may incur mortgage indebtedness and other borrowings, which may increase our
business risks.
In most
instances, we have acquired, and expect to acquire, real properties by using
either existing financing or borrowing new funds. In addition, we have
incurred mortgage debt and pledged all or some of our real properties as
security for that debt to obtain funds to acquire additional real properties and
may continue to do so. We may borrow if we need funds to satisfy the REIT
tax qualification requirement that we generally distribute at least 90% of our
annual REIT taxable income (which does not necessarily equal net income as
calculated in accordance with GAAP), determined without regard to the deduction
for dividends paid and excluding any net capital gain, to our
stockholders. We may also borrow if we otherwise deem it necessary or
advisable to assure that we maintain our qualification as a REIT for U.S.
federal income tax purposes.
Our
advisor believes that utilizing borrowing is consistent with our investment
objective of maximizing the return to investors. There is no limitation on
the amount we may borrow against any single improved property. However,
under our charter, we are required to limit our borrowings to 75% of the greater
of the aggregate cost (before deducting depreciation or other non-cash reserves)
or the aggregate fair market value of our gross assets as of the date of any
borrowing, unless excess borrowing is approved by a majority of the independent
directors. Our borrowings will not exceed 300% of our net assets
(generally equal to 75% of cost), unless the excess is approved by a majority of
our independent directors, which is the maximum level of indebtedness permitted
under the NASAA REIT Guidelines. We expect that during the period of this
offering we will request that our independent directors approve borrowings in
excess of this limitation since we will then be in the process of raising our
equity capital to acquire our portfolio. As a result, we expect that our
debt levels will be higher until we have invested most of our
capital.
If there
is a shortfall between the cash flow from a property and the cash flow needed to
service mortgage debt on a property, then the amount available for distributions
to stockholders may be reduced. In addition, incurring mortgage debt
increases the risk of loss since defaults on indebtedness secured by a property
may result in lenders initiating foreclosure actions. In that case, we
could lose the property securing the loan that is in default, thus reducing the
value of your investment. For tax purposes, a foreclosure of any of our
properties would be treated as a sale of the property for a purchase price equal
to the outstanding balance of the debt secured by the mortgage. If the
outstanding balance of the debt secured by the mortgage exceeds our tax basis in
the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds. In such event, we may be unable to pay the
amount of distributions required in order to maintain our REIT status. We
may give full or partial guarantees to lenders of mortgage debt to the entities
that own our properties. When we provide a guaranty on behalf of an entity
that owns one of our properties, we will be responsible to the lender for
satisfaction of the debt if it is not paid by such entity. If any
mortgages contain cross-collateralization or cross-default provisions, a default
on a single property could affect multiple properties. If any of our
properties are foreclosed upon due to a default, our ability to pay cash
distributions to our stockholders will be adversely affected which could result
in our losing our REIT status and would result in a decrease in the value of
your investment.
Current
state of debt markets could have a material adverse impact on our earnings and
financial condition
Continued
volatility in the credit markets and real estate markets could have a material
adverse effect on our results of operations, financial condition and ability to
pay distributions to our stockholders. Domestic and international
financial markets currently are experiencing continued volatility which has been
brought about in large part by failures in the U.S. banking system. This
volatility has severely impacted the availability of credit and has contributed
to rising costs associated with obtaining credit. If debt financing is not
available on terms and conditions we find acceptable, we may not be able to
obtain financing for investments. If this volatility in the credit markets
persists, our ability to borrow monies to finance the purchase of, or other
activities related to, properties and other real estate related assets will be
negatively impacted. If we are unable to borrow monies on terms and conditions
that we find acceptable, we likely will have to reduce the number of properties
we can purchase, and the return on the properties we do purchase may be lower.
In addition, we may find it difficult, costly or impossible to refinance
indebtedness which is maturing.
The
dislocations in the debt markets has reduced the amount of capital that is
available to finance real estate, which, in turn, (a) will no longer allow real
estate investors to rely on capitalization rate compression to generate returns
and (b) has slowed real estate transaction activity, all of which may reasonably
be expected to have a material impact, favorable or unfavorable, on revenues or
income from the acquisition and operations of real properties and mortgage
loans. Investors will need to focus on market-specific growth dynamics,
operating performance, asset management and the long-term quality of the
underlying real estate. In addition, we may find it difficult, costly or
impossible to refinance indebtedness which is maturing. If interest rates are
higher when the properties are refinanced, we may not be able to finance the
properties and our income could be reduced. In addition, if we pay fees to
lock-in a favorable interest rate, falling interest rates or other factors could
require us to forfeit these fees. All of these events would have a material
adverse effect on our results of operations, financial condition and ability to
pay distributions.
In
addition, the state of the debt markets could have an impact on the overall
amount of capital investing in real estate which may result in price or value
decreases of real estate assets. Although this may benefit us for future
acquisitions, it could negatively impact the current value of our existing
assets.
In
addition to volatility in the credit markets, the real estate market is subject
to fluctuation and can be impacted by factors such as general economic
conditions, supply and demand, availability of financing and interest rates. To
the extent we purchase real estate in an unstable market, we are subject to the
risk that if the real estate market ceases to attract the same level of capital
investment in the future that it attracts at the time of our purchases, or the
number of companies seeking to acquire properties decreases, the value of our
investments may not appreciate or may decrease significantly below the amount we
pay for these investments.
Finally,
the pervasive and fundamental disruptions that the global financial markets are
currently undergoing have led to extensive and unprecedented governmental
intervention. Although the government intervention is intended to stimulate the
flow of capital and to undergird the U.S. economy in the short term, it is
impossible to predict the actual effect of the government intervention and what
effect, if any, additional interim or permanent governmental intervention may
have on the financial markets and/or the effect of such intervention on us and
our results of operations. In addition, there is a high likelihood that
regulation of the financial markets will be significantly increased in the
future, which could have a material impact on our operating results and
financial condition.
High
mortgage rates may make it difficult for us to finance or refinance properties,
which could reduce the number of properties we can acquire and the amount of
cash distributions we can make.
If we
place mortgage debt on properties, we run the risk of being unable to refinance
the properties when the loans come due, or of being unable to refinance on
favorable terms. If interest rates are higher when the properties are
refinanced, we may not be able to finance the properties and our income could be
reduced. If any of these events occur, our cash flow would be
reduced. This, in turn, would reduce cash available for distribution to
you and may hinder our ability to raise more capital by issuing more stock or by
borrowing more money.
Lenders
may require us to enter into restrictive covenants relating to our operations,
which could limit our ability to make distributions to our
stockholders.
In
connection with providing us financing, a lender could impose restrictions on us
that affect our distribution and operating policies and our ability to incur
additional debt. Loan documents we enter into may contain covenants that
limit our ability to further mortgage the property, discontinue insurance
coverage or replace American Realty Capital Advisors, LLC as our advisor.
These or other limitations may adversely affect our flexibility and our ability
to achieve our investment and operating objectives.
Increases
in interest rates could increase the amount of our debt payments and adversely
affect our ability to pay distributions to our stockholders.
We expect
that we will incur indebtedness in the future. To the extent that we incur
variable rate debt, increases in interest rates would increase our interest
costs, which could reduce our cash flows and our ability to pay distributions to
you. In addition, if we need to repay existing debt during periods of
rising interest rates, we could be required to liquidate one or more of our
investments in properties at times that may not permit realization of the
maximum return on such investments.
We
have broad authority to incur debt, and high debt levels could hinder our
ability to make distributions and could decrease the value of your
investment.
Our
charter generally limits us to incurring debt no greater than 75% of the greater
of the aggregate cost (before deducting depreciation or other non-cash reserves)
or the aggregate fair market value of all of our assets as of the date of any
borrowing, unless any excess borrowing is approved by a majority of our
independent directors and disclosed to our stockholders in our next quarterly
report, along with a justification for such excess borrowing. We expect
that during the period of this offering we will request that our independent
directors approve borrowings in excess of this limitation since we will then be
in the process of raising our equity capital to acquire our portfolio. As
a result, we expect that our debt levels will be higher until we have invested
most of our capital. High debt levels would cause us to incur higher
interest charges, would result in higher debt service payments, and could be
accompanied by restrictive covenants. These factors could limit the amount
of cash we have available to distribute and could result in a decline in the
value of your investment.
U.S.
Federal Income Tax Risks
Our
failure to qualify or remain qualified as a REIT would subject us to U.S.
federal income tax and potentially state and local tax, and would adversely
affect our operations and the market price of our common stock.
We have
elected to be taxed as a REIT beginning with the tax year ending December 31,
2008 and intend to operate in a manner that will allow us to continue to qualify
as a REIT. In order for us to qualify as a REIT, we must satisfy certain
requirements set forth in the Code and Treasury Regulations and various factual
matters and circumstances that are not entirely within our control. We
intend to structure our activities in a manner designed to satisfy all of these
requirements. However, if certain of our operations were to be
recharacterized by the Internal Revenue Service, or the IRS, such
re-characterization could jeopardize our ability to satisfy all of the
requirements for qualification as a REIT. Proskauer Rose LLP, our legal
counsel, has rendered its opinion that we qualify as a REIT, based upon our
representations as to the manner in which we are and will be owned, invest in
assets and operate, among other things. However, our qualification as a
REIT will depend upon our ability to meet, through investments, actual operating
results, distributions and satisfaction of specific rules, the various tests
imposed by the Code. Proskauer Rose LLP will not review these operating
results or compliance with the qualification standards on an ongoing
basis. This means that we may fail to satisfy the REIT requirements in the
future. Also, this opinion represents Proskauer Rose LLP’s legal judgment
based on the law in effect as of the date of this prospectus. Proskauer
Rose LLP’s opinion is not binding on the IRS or the courts and we will not apply
for a ruling from the IRS regarding our status as a REIT. Future
legislative, judicial or administrative changes to U.S. federal income tax laws
could be applied retroactively, which could result in our disqualification as a
REIT.
If we
fail to qualify as a REIT for any taxable year, and we do not qualify for
certain statutory relief provisions, we will be subject to U.S. federal income
tax on our taxable income at corporate rates. In addition, we would
generally be disqualified from treatment as a REIT for the four taxable years
following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to stockholders
because of the additional tax liability. In addition, distributions to
stockholders would no longer qualify for the dividends paid deduction, and we
would no longer be required to make distributions. If this occurs, we
might be required to borrow funds or liquidate some investments in order to pay
the applicable tax.
Dividends
payable by REITs do not qualify for the reduced tax rates available for some
dividends.
The
maximum tax rate applicable to income from “qualified dividends” payable to U.S.
stockholders that are individuals, trusts and estates has been reduced by
legislation to 15% for tax years beginning before January 1, 2011. Dividends
payable by REITs, however, generally are not eligible for the reduced rates.
Although this legislation does not adversely affect the taxation of REITs or
dividends payable by REITs, the more favorable rates applicable to regular
corporate qualified dividends could cause investors who are individuals, trusts
and estates to perceive investments in REITs to be relatively less attractive
than investments in the stocks of non-REIT corporations that pay dividends,
which could adversely affect the value of the stock of REITs, including the
market price of our common stock.
Re-characterization
of sale-leaseback transactions may cause us to lose our REIT
status.
We may
purchase properties and lease them back to the sellers of such properties.
While we will use our best efforts to structure any such sale-leaseback
transaction so that the lease will be characterized as a “true lease,” thereby
allowing us to be treated as the owner of the property for U.S. federal income
tax purposes, the IRS could challenge such characterization. In the event
that any sale-leaseback transaction is challenged and recharacterized as a
financing transaction or loan for U.S. federal income tax purposes, deductions
for depreciation and cost recovery relating to such property would be
disallowed. If a sale-leaseback transaction were so recharacterized, we
might fail to satisfy the REIT qualification “asset tests” or the “income tests”
and, consequently, lose our REIT status effective with the year of
re-characterization. Alternatively, the amount of our REIT taxable income
could be recalculated which might also cause us to fail to meet the distribution
requirement for a taxable year.
REIT
distribution requirements could adversely affect our ability to execute our
business plan.
We
generally must distribute annually at least 90% of our REIT taxable income
(which does not equal net income, as calculated in accordance with GAAP),
determined without regard to the deduction for dividends paid and excluding any
net capital gain, in order for U.S. federal corporate income tax not to apply to
earnings that we distribute. If we satisfy this distribution requirement, but
distribute less than 100% of our taxable income, we will be subject to U.S.
federal corporate income tax on our undistributed taxable income. In addition,
we will incur a 4% nondeductible excise tax if the actual amount that we pay out
to our stockholders in a calendar year is less than a minimum amount specified
under federal tax laws. We intend to make distributions to our stockholders to
comply with the REIT requirements of the Code. From time to time, we may
generate taxable income greater than our income for financial reporting purposes
prepared in accordance with GAAP, or differences in timing between the
recognition of taxable income and the actual receipt of cash may
occur.
As a
result, we may find it difficult or impossible to meet distribution requirements
in certain circumstances. In particular, where we experience differences in
timing between the recognition of taxable income and the actual receipt of cash,
the requirement to distribute a substantial portion of our taxable income could
cause us to: (i) sell assets in adverse market conditions, (ii) borrow on
unfavorable terms, (iii) distribute amounts that would otherwise be invested in
future acquisitions, capital expenditures or repayment of debt or (iv) make a
taxable distribution of our shares as part of a distribution in which
shareholders may elect to receive shares or (subject to a limit measured as a
percentage of the total distribution) cash, in order to comply with REIT
requirements. These alternatives could increase our costs or reduce our equity.
Thus, compliance with the REIT requirements may hinder our ability to grow,
which could adversely affect the value of our common stock.
The
share ownership restrictions of the Code for REITs and the 9.8% share ownership
limit in our charter may inhibit market activity in our shares of stock and
restrict our business combination opportunities.
In order
to qualify as a REIT for each taxable year, five or fewer individuals, as
defined in the Code, may not own, actually or constructively, more than 50% in
value of our issued and outstanding shares of stock at any time during the last
half of a taxable year. Attribution rules in the Code determine if any
individual or entity actually or constructively owns our shares of stock under
this requirement. Additionally, at least 100 persons must beneficially own our
shares of stock during at least 335 days of a taxable year for each taxable
year. To help insure that we meet these tests, our charter restricts the
acquisition and ownership of our shares of stock.
Our
charter, with certain exceptions, authorizes our directors to take such actions
as are necessary and desirable to preserve our qualification as a REIT while we
so qualify. Unless exempted by our board of directors, as long as we qualify as
a REIT, our charter prohibits, among other limitations on ownership and transfer
of shares of our stock, any person from beneficially or constructively
owning (applying certain attribution rules under the Code) more than 9.8%
in value of the aggregate of our outstanding shares of stock and not more than
9.8% (in value or in number of shares, whichever is more restrictive) of any
class or series of shares of our stock. Our board of directors may not grant an
exemption from these restrictions to any proposed transferee whose ownership in
excess of 9.8% of the value of our outstanding shares would result in the
termination of our qualification as a REIT. These restrictions on
transferability and ownership will not apply, however, if our board of directors
determines that it is no longer in our best interest to continue to qualify as a
REIT.
These
ownership limits could delay or prevent a transaction or a change in control
that might involve a premium price for our common stock or otherwise be in the
best interest of the stockholders.
In
certain circumstances, we may be subject to federal and state income taxes as a
REIT, which would reduce our cash available for distribution to
you.
Even if
we qualify and maintain our status as a REIT, we may be subject to U.S. federal,
state, and local income taxes. For example, net income from the sale of
properties that are “dealer” properties sold by a REIT (a “prohibited
transaction” under the Code) will be subject to a 100% tax. We may not be
able to make sufficient distributions to avoid excise taxes applicable to
REITs. We may also decide to retain net capital gain we earn from the sale
or other disposition of our property and pay income tax directly on such
income. In that event, our stockholders would be treated as if they earned
that income and paid the tax on it directly. However, stockholders that
are tax-exempt, such as charities or qualified pension plans, would have no
benefit from their deemed payment of such tax liability unless they file U.S.
federal income tax returns and thereon seek a refund of such tax. We may
also be subject to state and local taxes on our income or property, including
franchise, payroll and transfer taxes, either directly or at the level of our
operating partnership or at the level of the other companies through which we
indirectly own our assets, such as taxable REIT subsidiaries (“TRS”), which are
subject to full U.S. federal, state, local and foreign corporate-level income
taxes. Any taxes we pay directly or indirectly will reduce our cash
available for distribution to you.
Legislative
or regulatory action could adversely affect investors.
In recent
years, numerous legislative, judicial and administrative changes have been made
in the provisions of U.S. federal income tax laws applicable to investments
similar to an investment in shares of our common stock. Additional changes
to the tax laws are likely to continue to occur, and we cannot assure you that
any such changes will not adversely affect the taxation of a stockholder.
Any such changes could have an adverse effect on an investment in our shares or
on the market value or the resale potential of our assets. You are urged
to consult with your tax advisor with respect to the impact of recent
legislation on your investment in our shares and the status of legislative,
regulatory or administrative developments and proposals and their potential
effect on an investment in our shares. You also should note that our
counsel’s tax opinion is based upon existing law, applicable as of the date of
its opinion, all of which will be subject to change, either prospectively or
retroactively.
Although
REITs continue to receive substantially better tax treatment than entities taxed
as corporations, it is possible that future legislation would result in a REIT
having fewer tax advantages, and it could become more advantageous for a company
that invests in real estate to elect to be taxed for U.S. federal income tax
purposes as a corporation. As a result, our charter provides our board of
directors with the power, under certain circumstances, to revoke or otherwise
terminate our REIT election and cause us to be taxed as a corporation, without
the vote of our stockholders. Our board of directors has fiduciary duties
to us and our stockholders and could only cause such changes in our tax
treatment if it determines in good faith that such changes are in the best
interest of our stockholders.
Complying
with REIT requirements may cause us to forego otherwise attractive opportunities
or liquidate otherwise attractive investments.
To
qualify as a REIT, we must continually satisfy tests concerning, among other
things, the sources of our income, the nature and diversification of our assets,
the amounts we distribute to our stockholders and the ownership of our stock. In
order to meet these tests, we may be required to forego investments we might
otherwise make or liquidate attractive investments from our portfolio. Thus,
compliance with the REIT requirements may hinder our operating
performance.
In
particular, we must ensure that at the end of each calendar quarter, at least
75% of the value of our assets consists of cash, cash items, government
securities and qualified real estate assets. The remainder of our investment in
securities (other than government securities and qualified real estate assets)
generally may not include more than 10% of the outstanding voting securities of
any one issuer or more than 10% of the total value of the outstanding securities
of any one issuer. In addition, in general, no more than 5% of the value of our
assets (other than government securities and qualified real estate assets) may
consist of the securities of any one issuer, and no more than 25% of the value
of our total assets can be represented by securities of one or more TRS. If we
fail to comply with these requirements at the end of any calendar quarter, we
must remedy the failure within 30 days after the end of the calendar quarter or
qualify for certain statutory relief provisions to avoid losing our REIT
qualification and experiencing adverse tax consequences. As a result, we may be
required to liquidate otherwise attractive investments. These actions could have
the effect of reducing our income and amounts available for distribution to our
stockholders.
We
may in the future choose to pay dividends in our own stock, in which case you
may be required to pay income taxes in excess of the cash dividends you
receive.
In
connection with our qualification as a REIT, we are required to generally
distribute at least 90% of our REIT taxable income (which does not equal net
income, as calculated in accordance with GAAP) each year, determined without
regard to the deduction for dividends paid and excluding any net capital gain.
In order to satisfy this requirement, we may distribute taxable dividends that
are payable in cash and shares of our common stock at the election of each
stockholder. Generally, under IRS Revenue Procedure 2010-12, up to 90% of any
such taxable dividend with respect to the taxable years 2010 and 2011 could be
payable in our common stock. Taxable stockholders receiving such dividends will
be required to include the full amount of the dividend as ordinary income to the
extent of our current or accumulated earnings and profits for U.S. federal
income tax purposes. As a result, U.S. stockholders may be required to pay
income taxes with respect to such dividends in excess of the cash dividends
received. Accordingly, U.S. stockholders receiving a distribution of our shares
may be required to sell shares received in such distribution or may be required
to sell other stock or assets owned by them, at a time that may be
disadvantageous, in order to satisfy any tax imposed on such distribution. If a
U.S. stockholder sells the stock that it receives as a dividend in order to pay
this tax, the sales proceeds may be less than the amount included in income with
respect to the dividend, depending on the market price of our stock at the time
of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may
be required to withhold U.S. tax with respect to such dividends, including in
respect of all or a portion of such dividend that is payable in stock, by
withholding or disposing of part of the shares in such distribution and using
the proceeds of such disposition to satisfy the withholding tax imposed. In
addition, if a significant number of our stockholders determine to sell shares
of our common stock in order to pay taxes owed on dividends, such sale may put
downward pressure on the price of our common stock.
Further,
while Revenue Procedure 2010-12 generally applies only to taxable dividends
payable in a combination of cash and stock with respect to the taxable years
2010 and 2011, it is unclear whether and to what extent we will be able to pay
taxable dividends in cash and stock in later years. Moreover, various tax
aspects of such a taxable cash/stock dividend are uncertain and have not yet
been addressed by the IRS. No assurance can be given that the IRS will not
impose additional requirements in the future with respect to taxable cash/stock
dividends, including on a retroactive basis, or assert that the requirements for
such taxable cash/stock dividends have not been met.
Complying
with REIT requirements may limit our ability to hedge effectively and may cause
us to incur tax liabilities.
The REIT
provisions of the Code substantially limit our ability to hedge our liabilities.
Any income from a hedging transaction we enter into to manage risk of interest
rate changes, price changes or currency fluctuations with respect to borrowings
made or to be made to acquire real estate assets, if properly identified under
applicable Treasury Regulations, does not constitute “gross income” for purposes
of the 75% or 95% gross income tests. To the extent that we enter into other
types of hedging transactions, the income from those transactions will likely be
treated as non-qualifying income for purposes of both of the gross income tests.
See “Material U.S. Federal Income Tax Considerations.” As a result of these
rules, we intend to limit our use of advantageous hedging techniques or
implement those hedges through a TRS. This could increase the cost of our
hedging activities because a TRS would be subject to tax on gains or expose us
to greater risks associated with changes in interest rates than we would
otherwise want to bear. In addition, losses in a TRS will generally not provide
any tax benefit, except for being carried forward against future taxable income
of such TRS.
Certain
of our business activities are potentially subject to the prohibited transaction
tax, which could reduce the return on your investment.
As long
as we qualify as a REIT, our ability to dispose of property during the first few
years following acquisition may be restricted to a substantial extent as a
result of our REIT qualification. Under applicable provisions of the Code
regarding prohibited transactions by REITs, while we qualify as a REIT, we will
be subject to a 100% penalty tax on any gain recognized on the sale or other
disposition of any property (other than foreclosure property) that we own,
directly or through any subsidiary entity, including our operating partnership,
but generally excluding our TRSs, that is deemed to be inventory or property
held primarily for sale to customers in the ordinary course of trade or
business. Whether property is inventory or otherwise held primarily for sale to
customers in the ordinary course of a trade or business depends on the
particular facts and circumstances surrounding each property. While we qualify
as a REIT, we intend to avoid the 100% prohibited transaction tax by (1)
conducting activities that may otherwise be considered prohibited transactions
through a TRS (but such TRS will incur income taxes), (2) conducting our
operations in such a manner so that no sale or other disposition of an asset we
own, directly or through any subsidiary, will be treated as a prohibited
transaction or (3) structuring certain dispositions of our properties to comply
with a prohibited transaction safe harbor available under the Code for
properties held for at least two years. However, despite our present intention,
no assurance can be given that any particular property we own, directly or
through any subsidiary entity, including our operating partnership, but
generally excluding any TRSs, will not be treated as inventory or property held
primarily for sale to customers in the ordinary course of a trade or
business.
If
we were considered to actually or constructively pay a “preferential dividend”
to certain of our stockholders, our status as a REIT could be adversely
affected.
In order
to qualify as a REIT, we must distribute to our stockholders at least 90% of our
annual REIT taxable income (excluding net capital gain), determined without
regard to the deduction for dividends paid. In order for distributions to be
counted as satisfying the annual distribution requirements for REITs, and to
provide us with a REIT-level tax deduction, the distributions must not be
“preferential dividends.” A dividend is not a preferential dividend if the
distribution is pro rata among all outstanding shares of stock within a
particular class, and in accordance with the preferences among different classes
of stock as set forth in our organizational documents. Currently, there is
uncertainty as to the IRS’s position regarding whether certain arrangements that
REITs have with their stockholders could give rise to the inadvertent payment of
a preferential dividend (e.g., the pricing methodology for stock purchased under
a distribution reinvestment program inadvertently causing a greater than 5%
discount on the price of such stock purchased). There is no de minimis exception
with respect to preferential dividends; therefore, if the IRS were to take the
position that we inadvertently paid a preferential dividend, we may be deemed to
have failed the 90% distribution test, and our status as a REIT could be
terminated for the year in which such determination is made if we were unable to
cure such failure. While we believe that our operations have been structured in
such a manner that we will not be treated as inadvertenly paying
preferential dividends, we can provide no assurance to this effect.
Our
ownership of a taxable REIT subsidiary will be limited and our transactions with
a taxable REIT subsidiary will cause us to be subject to a 100% penalty tax on
certain income or deductions if those transactions are not conducted on arm’s
length terms.
A REIT
may own up to 100% of the stock of one or more TRSs. A TRS may hold assets
and earn income that would not be qualifying assets or income if held or earned
directly by a REIT. Both the subsidiary and the REIT must jointly elect to
treat the subsidiary as a TRS. A corporation of which a TRS directly or
indirectly owns more than 35% of the voting power or value of the stock will
automatically be treated as a TRS. Overall, no more than 25% of the value
of a REIT’s assets may consist of stock or securities of one or more TRSs.
In addition, the TRS rules in certain instances limit the deductibility of
interest paid or accrued by a TRS to its affiliated REIT to assure that the TRS
is subject to an appropriate level of corporate taxation. The rules also impose
a 100% excise tax on certain transactions between a TRS and its parent REIT that
are not conducted on an arm’s-length basis.
We intend
to use a TRS for short- and medium-term net lease assets that we intend to
acquire and promptly resell for immediate gain. Our TRS will pay U.S.
federal, state and local income tax on its taxable income, and its after-tax net
income will be available for distribution to us but is not required to be
distributed. We anticipate that securities of our TRS will not make up
more than 25% of the value of our total assets. We will monitor the value
of our investments in our TRS for the purpose of ensuring compliance with TRS
ownership limitations. Furthermore, we will scrutinize all of our
transactions with our TRSs to ensure that they are entered into on arm’s length
terms to avoid incurring the 100% penalty tax described above. There can be no
assurance, however, that we will be able to comply with the 25% limitation
discussed above or to avoid application of the 100% penalty tax discussed
above.
If
our operating partnership failed to qualify as a partnership for U.S. federal
income tax purposes, we would cease to qualify as a REIT and suffer other
adverse consequences.
We
believe that our operating partnership will qualify to be treated as a
partnership for U.S. federal income tax purposes. As a partnership, our
operating partnership will not be subject to U.S. federal income tax on its
income. Instead, each of its partners, including us, will be required to include
its allocable share of the operating partnership’s income in computing its
taxable income. We cannot assure you, however, that the IRS, will not challenge
our operating partnership’s status as a partnership for U.S. federal income tax
purposes, or that a court would not sustain such a challenge. If the IRS were
successful in treating our operating partnership as a corporation for U.S.
federal income tax purposes, we would fail to meet the gross income tests and
certain of the asset tests applicable to REITs and, accordingly, cease to
qualify as a REIT. Also, the failure of our operating partnership to qualify as
a partnership would cause it to become subject to U.S. federal and state
corporate income tax, which would reduce significantly the amount of cash
available for debt service and for distribution to its partners, including
us.
Foreign
purchasers of our common stock may be subject to FIRPTA tax upon the sale of
their shares.
A foreign person
disposing of a U.S. real property interest, including shares of a U.S.
corporation whose assets consist principally of U.S. real property interests, is
generally subject to the Foreign Investment in Real Property Tax of 1980, as
amended, known as FIRPTA, on the gain recognized on the disposition. Such
FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the
REIT is “domestically controlled.” A REIT is “domestically controlled” if less
than 50% of the REIT’s stock, by value, has been owned directly or indirectly by
persons who are not qualifying U.S. persons during a continuous five-year period
ending on the date of disposition or, if shorter, during the entire period of
the REIT’s existence. We cannot assure you that we will qualify as a
“domestically controlled” REIT. If we were to fail to so qualify, gain
realized by foreign investors on a sale of our shares would be subject to FIRPTA
tax, unless our shares were traded on an established securities market and the
foreign investor did not at any time during a specified testing period directly
or indirectly own more than 5% of the value of our outstanding common
stock. See “Material U.S. Federal Income Tax Considerations — Special Tax
Considerations for Non-US. Stockholders — Sale of our Shares by a Non-US.
Stockholder.”
In order to avoid triggering
additional taxes and/or penalties, if you intend to invest in our shares through
pension or profit-sharing trusts or IRAs, you should consider additional
factors.
If you
are investing the assets of a pension, profit-sharing, 401(k), Keogh or other
qualified retirement plan or the assets of an IRA in our common stock, you
should satisfy yourself that, among other things:
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your
investment is consistent with your fiduciary obligations under ERISA and
the Internal Revenue Code;
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your
investment is made in accordance with the documents and instruments
governing your plan or IRA, including your plan’s investment
policy;
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your
investment satisfies the prudence and diversification requirements of
ERISA;
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your
investment will not impair the liquidity of the plan or
IRA;
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your
investment will not produce UBTI for the plan or
IRA;
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you
will be able to value the assets of the plan annually in accordance with
ERISA or Code requirements; and
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your
investment will not constitute a non-exempt prohibited transaction under
Section 406 of ERISA or Section 4975 of the Internal Revenue
Code.
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For a
more complete discussion of the foregoing risks and other issues associated with
an investment in shares by retirement plans, please see the “Investment by
Tax-Exempt Entities and ERISA Considerations” section of this
prospectus.
Qualifying
as a REIT involves highly technical and complex provisions of the
Code.
Qualification
as a REIT involves the application of highly technical and complex Code
provisions for which only limited judicial and administrative authorities exist.
Even a technical or inadvertent violation could jeopardize our REIT
qualification. Our qualification as a REIT will depend on our satisfaction of
certain asset, income, organizational, distribution, stockholder ownership and
other requirements on a continuing basis. In addition, our ability to satisfy
the requirements to qualify as a REIT depends in part on the actions of third
parties over which we have no control or only limited influence, including in
cases where we own an equity interest in an entity that is classified as a
partnership for U.S. federal income tax purposes.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements contained in this registration statement, other than historical
facts, may be considered forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Exchange Act. We
intend for all such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in Section 27A of the
Securities Act and Section 21E of the Exchange Act, as applicable by law.
Such statements include, in particular, statements about our plans, strategies,
and prospects and are subject to certain risks and uncertainties, as well as
known and unknown risks, which could cause actual results to differ materially
from those projected or anticipated. Therefore, such statements are not
intended to be a guarantee of our performance in future periods. Such
forward-looking statements can generally be identified by our use of
forward-looking terminology such as “may,” “will,” “would,” “could,” “should,”
“expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other
similar words. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date this report is filed
with the Securities and Exchange Commission. We make no representation or
warranty (express or implied) about the accuracy of any such forward-looking
statements contained in this registration statement, and we do not undertake to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, or otherwise. Any forward-looking
statements are subject to unknown risks and uncertainties, including those
discussed in the “Risk Factors” section of this registration
statement.
ESTIMATED
USE OF PROCEEDS
The
following table sets forth information about how we have used proceeds raised in
the initial offering and intend to use the proceeds raised in this follow-on
offering, assuming that we sell the maximum offering of 150,000,000 shares of
common stock pursuant to the initial offering and 32,500,000 shares of
common stock pursuant to this follow-on offering; the combined total offering
amount will not exceed $1.5 billion. Many of the figures set forth below
represent management’s best estimate since they cannot be precisely calculated
at this time. Assuming a maximum offering, we expect that approximately
87.115% of the money that stockholders invest will be used to buy real estate or
make other investments and approximately 0.1% will be used for working capital,
while the remaining approximately 12.885% will be used to pay expenses and fees
including the payment of fees to Realty Capital Advisors, LLC, our advisor, and
Realty Capital Securities, LLC, our dealer manager.
|
|
Actual Initial
Offering Amount
(as of June 30, 2010)
|
|
|
Maximum Initial
Offering(1)
(Not Including
Distribution
Reinvestment Plan)
|
|
|
Maximum Follow-
On Offering(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Offering Proceeds
|
|
$ |
328,652,000 |
|
|
$ |
1,500,000,000 |
|
|
$ |
325,000,000 |
|
|
|
100 |
% |
Less
Public Offering Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Commissions and Dealer Manager Fee(2)
|
|
$ |
26,814,000 |
|
|
|
150,000,000 |
|
|
|
32,500,000 |
|
|
|
10.0 |
% |
Organization
and Offering Expenses(3)
|
|
$ |
14,027,000 |
|
|
|
22,500,000 |
|
|
|
4,875,000 |
|
|
|
1.5 |
% |
Amount
Available for Investment(4)
|
|
$ |
287,811,000 |
|
|
|
287,625,000 |
|
|
|
287,625,000 |
|
|
|
88.5 |
% |
Acquisition
and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
and Advisory Fees(5)
|
|
$ |
4,982,000 |
|
|
|
13,275,000 |
|
|
|
2,545,481 |
|
|
|
0.885 |
% |
Acquisition
Expenses(6)
|
|
$ |
2,626,000 |
|
|
|
6,000,000 |
|
|
|
1,150,500 |
|
|
|
0.4 |
% |
Initial
Working Capital Reserve(7)
|
|
|
|
|
|
1,500,000 |
|
|
|
325,000 |
|
|
|
0.1 |
% |
Amount
Invested in Properties(8)
|
|
$ |
280,203,000 |
|
|
$ |
1,306,725,000 |
|
|
$ |
283,604,019 |
|
|
|
87.115 |
% |
(1)
|
Assumes
the maximum initial offering is sold, which includes 150,000,000 shares
offered to the public at $10.00 per share. No effect is given to the
shares offered pursuant to our initial offering’s distribution
reinvestment plan.
|
(2)
|
Includes
selling commissions equal to 7% of aggregate gross offering proceeds,
which commissions may be reduced for volume discounts described in “Plan
of Distribution – Volume Discounts” herein, and a dealer manager fee equal
to 3% of aggregate gross offering proceeds, both of which are payable to
the dealer manager, an affiliate of our advisor. The dealer manager,
in its sole discretion, may reallow selling commissions of up to 7% of
gross offering proceeds to other broker-dealers participating in this
offering attributable to the shares sold by them and will reallow its
dealer manager fee up to 3% of gross offering proceeds in marketing fees
to broker-dealers participating in this offering based upon such factors
as the volume of sales of such broker-dealers, the level of marketing
support provided by such broker-dealers and the assistance of such
broker-dealers in marketing the offering, or to reimburse representatives
of such broker-dealers for the costs and expenses of attending our
educational conferences and seminars. See the “Plan of Distribution”
section of this prospectus for a description of the volume discount
provisions.
|
(3)
|
Organization
and offering expenses consist of reimbursement of actual legal,
accounting, printing and other accountable offering expenses, including
amounts to reimburse American Realty Capital Advisors, LLC, our advisor,
for marketing, salaries and direct expenses of its employees, and
employees of its affiliates while engaged in registering and marketing the
shares (including, without limitation, development of marketing materials
and marketing presentations, and participating in due diligence, training
seminars and educational conferences) and other marketing, coordination,
administrative oversight and organization costs, other than selling
commissions and the dealer manager fee. American Realty Capital
Advisors, LLC and its affiliates are responsible for the payment of
organization and offering expenses, other than selling commissions and the
dealer manager fee, to the extent they exceed 1.5% of gross offering
proceeds, without recourse against or reimbursement by us; provided,
however, that in no event will we pay or reimburse organization and
offering expenses in excess of 10% of the gross offering proceeds.
We currently estimate that approximately $5,250,000 of organization and
offering costs will be incurred if the maximum follow-on offering of
35,000,000 shares is sold.
|
(4)
|
Until
required in connection with the acquisition and/or development of
properties, substantially all of the net proceeds of the offering and,
thereafter, any working capital reserves we may have, may be invested in
short-term, highly-liquid investments including government obligations,
bank certificates of deposit, short-term debt obligations and
interest-bearing accounts.
|
(5)
|
Acquisition
fees are defined generally as fees and commissions paid by any party to
any person in connection with identifying, reviewing, evaluating,
investing in and the purchase, development or construction of
properties. We will pay to our advisor, acquisition fees of 1% of
the gross purchase price of each property acquired, which for purposes of
this table we have assumed is an aggregate amount equal to our estimated
amount invested in properties. Acquisition fees do not include
acquisition expenses. For purposes of this table, we have assumed
that no financing is used to acquire properties or other real estate
assets.
|
(6)
|
Acquisition
expenses include legal fees and expenses, travel expenses, costs of
appraisals, nonrefundable option payments on property not acquired,
accounting fees and expenses, title insurance premiums and other closing
costs, personnel costs and miscellaneous expenses relating to the
selection, acquisition and development of real estate properties.
For purposes of this table, we have assumed expenses of 0.5% of average
invested assets, which for purposes of this table we have assumed is our
estimated amount invested in properties; however, expenses on a particular
acquisition may be higher. Notwithstanding the foregoing, the total
of all acquisition expenses and acquisition fees payable with respect to a
particular property or investment shall be reasonable, and shall not
exceed an amount equal to 4% of the gross purchase price of the property,
or in the case of a mortgage loan 4% of the funds advanced, unless a
majority of our directors (including a majority of our independent
directors) not otherwise interested in the transaction approve fees and
expenses in excess of this limit and determine the transaction to be
commercially competitive, fair and reasonable to
us.
|
(7)
|
Working
capital reserves typically are utilized for extraordinary expenses that
are not covered by revenue generation of the property, such as tenant
improvements, leasing commissions and major capital expenditures.
Alternatively, a lender may require its own formula for escrow of working
capital reserves. Because we expect most of our leases will be “net”
leases, as described elsewhere herein, we do not expect to maintain
significant working capital
reserves.
|
(8)
|
Includes
amounts anticipated to be invested in properties net of fees, expenses and
initial working capital reserves.=
|
(9)
|
The
total amount raised between the initial and follow-on offering will not
exceed $1.5 billion, excluding any funds raised by the distribution
reinvestment plan.
|
MANAGEMENT
General
We
operate under the direction of our board of directors, the members of which are
accountable to us and our stockholders as fiduciaries. The board is
responsible for the overall management and control of our affairs. The
board has retained American Realty Capital Advisors, LLC to manage our
day-to-day affairs and the acquisition and disposition of our investments,
subject to the board’s supervision. As described in greater detail under
“Our Advisor,” below, our advisor will be responsible (with the approval of the
independent directors, in the case of the purchase of a property from an
affiliate) for making investment decisions where the purchase price of a
particular property is less than $15,000,000 and the investment does not exceed
stated leverage limitations. Where such leverage limitations are exceeded
or where the purchase price is equal to or greater than $15,000,000, investment
decisions will be made by our board of directors.
Our
charter has been reviewed and ratified by our entire board of directors,
including the independent directors. This ratification by our board of
directors is required by the Statement of Policy Regarding Real Estate
Investment Trusts published by the North American Securities Administrators
Association, also known as the NASAA REIT Guidelines.
Our
charter and bylaws provide that the number of our directors may be established
by a majority of the entire board of directors, and after we commence this
offering may not be fewer than three nor more than nine. Our charter
provides that, after we commence this offering, a majority of the directors must
be independent directors, except for a period of up to 60 days after the death,
resignation or removal of an independent director. An “independent
director” is a person who is not one of our officers or employees or an officer
or employee of American Realty Capital Advisors, LLC or its affiliates or any
other real estate investment trust organized by our sponsor or advised by
American Realty Capital Advisors, LLC, has not otherwise been affiliated with
such entities for the previous two years and does not serve as a director of
more than three REITs organized by any principal executive or advised by
American Realty Capital Advisors, LLC. Of our five directors, three are
considered independent directors. There are no family relationships among
any of our directors or officers, or officers of our advisor. Each
director must have at least three years of relevant experience demonstrating the
knowledge and experience required to successfully acquire and manage the type of
assets being acquired by us. At least one of the independent directors
must have at least three years of relevant real estate experience and at least
one of our independent directors must be a financial expert with at least three
years of relevant financial experience. Currently, substantially all of
our directors has substantially in excess of three years of relevant real estate
experience. Furthermore, our board of directors believe that diversity is
an important attribute of the members who comprise our board of directors and
that the members should represent an array of backgrounds and experiences. In
making its determinations, the nominating and corporate governance committee
reviews the appropriate experience, skills and characteristics required of
directors in the context of our business. This review includes, in the context
of the perceived needs of the board at that time, issues of knowledge,
experience, judgment and skills relating to the understanding of the real estate
industry, accounting or financial expertise. The nominating and corporate
governance committee also gives consideration to the board having a diverse and
appropriate mix of backgrounds and skills, the requirements in our charter and
ability to exercise independence of thought, objective perspective and mature
judgment and understand our business operations and objectives.
Each
director will serve until the next annual meeting of stockholders or until his
or her successor is duly elected and qualified. Although the number of
directors may be increased or decreased, a decrease will not have the effect of
shortening the term of any incumbent director.
Any
director may resign at any time and may be removed with or without cause by the
stockholders upon the affirmative vote of at least a majority of all the votes
entitled to be cast at a meeting properly called for the purpose of the proposed
removal.
Any
vacancy created by an increase in the number of directors or the death,
resignation, removal, adjudicated incompetence or other incapacity of a director
may be filled only by a vote of a majority of the remaining directors.
Independent directors shall nominate replacements for vacancies in the
independent director positions. If at any time there are no directors in
office, successor directors shall be elected by the stockholders. Each
director will be bound by the charter and the bylaws.
The
directors are not required to devote all of their time to our business and are
only required to devote the time to our affairs as their duties require.
The directors meet quarterly or more frequently if necessary. Our
directors are not required to devote a substantial portion of their time to
discharge their duties as our directors. Consequently, in the exercise of
their responsibilities, the directors heavily rely on our advisor. Our
directors have a fiduciary duty to our stockholders to supervise the
relationship between us and our advisor. The board is empowered to fix the
compensation of all officers that it selects and approve the payment of
compensation to directors for services rendered to us in any other
capacity.
Our board
of directors has established policies on investments and borrowing, the general
terms of which are set forth in this prospectus. The directors may
establish further policies on investments and borrowings and are required to
monitor our administrative procedures, investment operations and performance to
ensure that the policies are fulfilled and are in the best interest of our
stockholders.
The
independent directors are responsible for reviewing our fees and expenses on at
least an annual basis and with sufficient frequency to determine that the
expenses incurred are in the best interest of the stockholders. In
addition, a majority of the directors, including a majority of the independent
directors who are not otherwise interested in the transaction, must determine
that any transaction with American Realty Capital Advisors, LLC or its
affiliates is fair and reasonable to us. The independent directors also
are responsible for reviewing the performance of American Realty Capital
Advisors, LLC and determining that the compensation to be paid to American
Realty Capital Advisors, LLC is reasonable in relation to the nature and quality
of services to be performed and that the provisions of the advisory agreement
are being carried out. Specifically, the independent directors consider
factors such as:
|
·
|
the
amount of the fees paid to American Realty Capital Advisors, LLC or its
affiliates in relation to the size, composition and performance of our
investments;
|
|
·
|
the
success of American Realty Capital Advisors, LLC in generating appropriate
investment opportunities;
|
|
·
|
rates
charged to other REITs, and other investors by advisors performing similar
services;
|
|
·
|
additional
revenues realized by American Realty Capital Advisors, LLC and its
affiliates through their relationship with us, whether we pay them or they
are paid by others with whom we do
business;
|
|
·
|
the
quality and extent of service and advice furnished by American Realty
Capital Advisors, LLC;
|
|
·
|
the
performance of our investment portfolio, including income, conservation or
appreciation of capital, frequency of problem investments and competence
in dealing with distress situations;
and
|
|
·
|
the
quality of our portfolio relative to the investments generated by American
Realty Capital Advisors, LLC or its affiliates for its other
clients.
|
Neither
our advisor or any of its affiliates nor any director may vote or consent to the
voting of shares of our common stock they now own or hereafter acquire on
matters submitted to the stockholders regarding either (a) the removal of such
director or American Realty Capital Advisors, LLC as our advisor, or (b) any
transaction between us and American Realty Capital Advisors, LLC, such director
or any of their respective affiliates.
Committees
of the Board of Directors
Our
entire board of directors considers all major decisions concerning our business,
including property acquisitions. However, our bylaws provide that our
board must establish an audit committee composed of three independent directors
(one of whom must be an expert in the field of finance) and may establish an
Executive Committee, a Compensation Committee or such other committees as the
board believes appropriate. The board will appoint the members of the
committee in the board’s discretion. Our bylaws require that a majority of
the members of each committee of our board other than the audit committee be
comprised of independent directors. Our board of directors has established
and adopted charters for an audit committee, a conflicts committee and a
nominating and corporate governance committee.
Audit
Committee
Our board
of directors has established an audit committee, which consists of our three
independent directors. The chairman of the audit committee is Leslie
Michelson. The audit committee, by approval of at least a majority of the
members, selects the independent registered public accounting firm to audit our
annual financial statements, reviews with the independent registered public
accounting firm the plans and results of the audit engagement, approves the
audit and non-audit services provided by the independent registered public
accounting firm, reviews the independence of the independent registered public
accounting firm, considers the range of audit and non-audit fees and reviews the
adequacy of our internal accounting controls. Our board of directors has
adopted a charter for the audit committee that sets forth its specific functions
and responsibilities, which can be found at
http://www.americanrealtycap.com/uploads/AuditCommitteeCharter.pdf. The
financial statements contained in the prospectus were audited by our independent
registered public accounting firm who were not approved or selected by an audit
committee containing any independent directors. Also, the financial
statements were not reviewed by independent directors.
Executive
Officers and Directors
We have
provided below certain information about our executive officers and directors,
all of whom, other than the Independent Directors, are employees only of
American Realty Capital Advisors, LLC and not of any other of the
affiliates.
|
|
|
|
|
Nicholas
S. Schorsch
|
|
49
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
William
M. Kahane
|
|
62
|
|
President,
Chief Operating Officer, Treasurer and Director
|
Peter
M. Budko
|
|
50
|
|
Executive
Vice President and Chief Investment Officer
|
Brian
S. Block
|
|
38
|
|
Executive
Vice President and Chief Financial Officer
|
Edward
M. Weil, Jr.
|
|
43
|
|
Executive
Vice President and Secretary
|
Leslie
D. Michelson
|
|
59
|
|
Independent
Director
|
William
G. Stanley
|
|
54
|
|
Independent
Director
|
Robert
H. Burns
|
|
80
|
|
Independent
Director
|
Nicholas S. Schorsch has
served as the chairman of the board and chief executive officer of our company
since our formation. He also has been the chief executive officer of
American Realty Capital Properties, LLC, and American Realty Capital Advisors,
LLC since its formation. Since October 2009, Mr. Schorsch has also served
as Chairman of the Board and Chief Executive Officer of Recovery REIT and Chief
Executive Officer of the property manager and advisor of Recovery REIT.
Prior to his current position with our company, from September 2006 to July
2007, Mr. Schorsch was Chief Executive Officer of an affiliate, American Realty
Capital, a real estate investment firm. Mr. Schorsch founded and formerly
served as President, CEO and Vice-Chairman of American Financial Realty Trust
(“AFR”) since its inception as a REIT in September 2002 until August 2006.
American Financial Realty Trust is a publicly traded REIT that invests
exclusively in offices, operation centers, bank branches, and other operating
real estate assets that are net leased to tenants in the financial service
industry such as banks and insurance companies. Through American Financial
Resource Group and its successor corporation, now American Financial Realty
Trust, Mr. Schorsch has executed in excess of 1,000 acquisitions, both in
acquiring businesses and real estate property with transactional value of
approximately $5 billion. In 2003, Mr. Schorsch received an Entrepreneur
of the Year award from Ernst & Young. From 1995 to September 2002, Mr.
Schorsch served as CEO and President of American Financial Resource Group
(“AFRG”), AFR’s predecessor, a private equity firm founded for the purpose of
acquiring operating companies and other assets in a number of industries.
In 1998, Mr. Schorsch was engaged in operating Arlington Cemetery and several
other AFRG highly specialized enterprises when he learned that First Union
Corporation was divesting 105 bank branches. He offered to buy the entire
portfolio and approximately one month later Mr. Schorsch had closed on all
105 branches. Prior to this transaction, it was very unusual to buy a
portfolio of this magnitude without first “cherry-picking” the best
locations. Prior to AFRG, Mr. Schorsch served as President of a
non-ferrous metal product manufacturing business, Thermal Reduction. He
successfully built the business through mergers and acquisitions and ultimately
sold his interests to Corpro (NYSE) in 1994. We believe that Mr.
Schorsch’s previous experience as president, Chief Executive Officer and vice
chairman of AFR and his significant real estate acquisition experience make him
well qualified to serve as our Chairman of the Board.
William M. Kahane has served
as President, chief operating officer, treasurer and director of our company
since its formation. He has been active in the structuring and financial
management of commercial real estate investments for over 25 years. He is
also president, chief operating officer and treasurer of American Realty Capital
Properties, LLC and American Realty Capital Advisors, LLC. Since October
2009, Mr. Kahane has also served as the president, treasurer and director of
Recovery REIT and president, chief operating officer and treasurer of both the
property manager and advisor of Recovery REIT. Mr. Kahane began his career
as a real estate lawyer practicing in the public and private sectors from 1974 –
1979. From 1981 – 1992 Mr. Kahane worked at Morgan Stanley & Co.,
specializing in real estate, becoming a Managing Director in 1989. In
1992, Mr. Kahane left Morgan Stanley to establish a real estate advisory and
asset sales business known as Milestone Partners which continues to operate and
of which Mr. Kahane is currently the Chairman. Mr. Kahane worked very
closely with Mr. Schorsch while a trustee at AFRT (2003 to 2006), during which
time Mr. Kahane served as Chairman of the Finance Committee of the Board of
Trustees. Mr. Kahane has been a Managing Director of GF Capital Management
& Advisors LLC, a New York-based merchant banking firm, where he directs the
firm’s real estate investments since 2001. GF Capital offers comprehensive
wealth management services through its subsidiary TAG Associates LLC, a leading
multi-client family office and portfolio management services company with
approximately $5 billion of assets under management. Mr. Kahane also was
on the Board of Directors of Catellus Development Corp., an NYSE growth-oriented
real estate development company, where he served as Chairman. We believe
that Mr. Kahane’s prior experience as chairman of the board of Catellus
Development Corp. and his significant investment banking experience in real
estate make him well qualified to serve as a member of our Board of
Directors.
Peter M. Budko has served as
Executive Vice President and Chief Investment Officer of our company since its
formation. He also is executive vice president and chief investment
officer of American Realty Capital Advisors, LLC, American Realty Capital
Properties, LLC and Realty Capital Securities, LLC. Since October 2009,
Mr. Budko has also served as Executive Vice President & Chief Operating
Officer of Recovery REIT and Executive Vice President of both the property
manager and advisor of Recovery REIT. Prior to his current position, from
January 2007 to July 2007, Mr. Budko was Chief Operating Officer of an
affiliated American Realty Capital real estate investment firm. Mr. Budko
founded and formerly served as Managing Director and Group Head of the
Structured Asset Finance Group, a division of Wachovia Capital Markets, LLC from
1997 – 2006. The Structured Asset Finance Group structures and invests in
real estate that is net leased to corporate tenants. While at Wachovia,
Mr. Budko acquired over $5 billion of net leased real estate assets. From
1987 – 1997, Mr. Budko worked in the Corporate Real Estate Finance Group at
NationsBank Capital Market (predecessor to Bank of America Securities) becoming
head of the group in 1990.
Brian S. Block has served as
Executive Vice President and Chief Financial Officer since September 2007.
He is also Executive Vice President and Chief Financial Officer of American
Realty Capital, LLC and American Realty Capital Properties, LLC. Since
October 2009, Mr. Block has also served as Executive Vice President & Chief
Financial Officer of Recovery REIT, Inc. and of both the property manager and
advisor of Recovery REIT, Inc. Mr. Block is responsible for the
accounting, finance and reporting functions at ARC. He has extensive
experience in SEC reporting requirements as well as REIT tax compliance
matters. Mr. Block has been instrumental in developing ARC’s
infrastructure and positioning the organization for growth. Mr. Block
began his career in public accounting at Ernst & Young and Arthur Andersen
from 1994 to 2000. Subsequently, Mr. Block was the Chief Financial Officer
of a venture capital-backed technology company for several years prior to
joining AFRT in 2002. While at AFRT, Mr. Block served as Chief Accounting
Officer from 2003 to 2007 and oversaw the financial, administrative and
reporting functions of the organization. He is a certified public
accountant and is a member of the AICPA and PICPA. Mr. Block serves on the
REIT Committee of the Investment Program Association.
Edward M. Weil, Jr. has served
as our Executive Vice President and Secretary since May 2007. He is also
executive vice president and secretary of American Realty Capital Advisors, LLC
and American Realty Capital Properties, LLC. Since October 2009, Mr. Weil
has also served as Executive Vice President and Secretary of Recovery REIT and
of both the property manager and advisor of Recovery REIT. He was formerly
the Senior Vice President of Sales and Leasing for American Financial Realty
Trust (AFR, from April 2004 to October 2006), where he was responsible for the
disposition and leasing activity for a 33 million square foot portfolio.
Under the direction of Mr. Weil, his department was the sole contributor in the
increase of occupancy and portfolio revenue through the sales of over 200
properties and the leasing of over 2.2 million square feet, averaging 325,000
square feet of newly executed leases per quarter. After working at AFR,
from October 2006 to May 2007, Mr. Weil was managing director of Milestone
Partners Limited and prior to joining AFR, from 1987 to April 2004, Mr. Weil was
president of Plymouth Pump & Systems Co.
Leslie D. Michelson was
appointed as an Independent Director of our company on January 22, 2008.
He was also appointed as an Independent Director of Recovery REIT on October 27,
2009. Mr. Michelson has served as the Chairman and Chief Executive Officer
of Private Health Management, a retainer-based primary care medical practice
management company since April 2007. Mr. Michelson served as Vice Chairman
and Chief Executive Officer of the Prostate Cancer Foundation, the world’s
largest private source of prostate cancer research funding, from April 2002
until December 2006 and currently serves on its Board of Directors. Mr.
Michelson served on the Board of Directors of Catellus Development Corp.
(a publicly traded national mixed-use and retail developer) from 1997 until 2004
when the company was sold to ProLogis. Mr. Michelson was a member of the
Audit Committee of the Board of Directors for 5 years. From April 2001 to
April 2002, he was an investor in, and served as an advisor or director of, a
portfolio of entrepreneurial healthcare, technology and real estate
companies. From March 2000 to August 2001, he served as Chief Executive
Officer and as a director of Acurian, Inc., an Internet company that accelerates
clinical trials for new prescription drugs. From 1999 to March 2000, Mr.
Michelson served as an advisor of Saybrook Capital, LLC, an investment bank
specializing in the real estate and health care industries. From June 1998
to February 1999, Mr. Michelson served as Chairman and Co-Chief Executive
Officer of Protocare, Inc., a manager of clinical trials for the pharmaceutical
industry and disease management firm. From 1988 to 1998, he served as
Chairman and Chief Executive Officer of Value Health Sciences, Inc., an applied
health services research firm he co-founded. Since June 2004 and through
the present, he has been and is a director of Nastech Pharmaceutical Company
Inc., a NASDAQ-traded biotechnology company focused on innovative drug delivery
technology, Highlands Acquisition Company, a AMEX-traded special purpose
acquisition company, and Landmark Imaging, a privately held imaging
center. Also since June 2004 and through the present, he has been and is a
Director of ALS-TDI, a philanthropy dedicated to curing Amyotrophic Lateral
Sclerosis (ALS), commonly known as Lou Gehrig’s disease. Mr. Michelson
received his BA. from The Johns Hopkins University in 1973 and a J.D. from Yale
Law School in 1976. We believe that Mr. Michelson’s previous experience as
a member of the Board of Directors of Catellus Development Corp., an NYSE
growth-oriented real estate development company, where he served as a member of
the Audit Committee and his legal education make him well qualified to serve as
a member of our Board of Directors.
William G. Stanley was
appointed as an Independent Director of our company on January 22, 2008.
He was also appointed as an Independent Director of Recovery REIT on October 27,
2009. Mr. Stanley is the founder and managing member of Stanley Laman
Securities, LLC (SLS), a FINRA member broker-dealer, since 2004, and the founder
and president of The Stanley-Laman Group, Ltd (SLG), a registered investment
advisor for high net worth clients since 1997. SLG has built a
multi-member staff which critically and extensively studies the research of the
world’s leading economists and technical analysts to support its tactical
approach to portfolio management. Over its history, SLG and SLS have
assembled a unique and impressive array of intellectual property in the
investment, estate, tax and business planning arenas and boasts a portfolio
management returns that rivals or exceeds top global managers.
Additionally SLG counts some of the countries wealthiest and most successful
business owners and entrepreneurs as its clients. Mr. Stanley has been
Managing Member of Stanley Laman Securities, LLC from 2004 to the present and
President of the Stanley-Laman Group, Ltd. Mr. Stanley has earned
designations as a Chartered Financial Consultant, Chartered Life Underwriter,
and received his Masters of Financial Sciences from the American College in
1997. From 1977 to 1979, Mr. Stanley served as a District Field
Representative at General Electric Capital. From 1979 to 1986, Mr. Stanley
was a Senior Vice President at Capital Analysts (CA) of Radnor, Pennsylvania, a
national investment advisory firm. From 1986 to 1991, Mr. Stanley was
Senior Vice President at First Capital Analysts (CA Affiliate). Stanley’s
practice within CA was to serve the ultra high net worth private business owners
and investors and specialized in bringing creative investment and planning
trends to his clients. In the early 1980’s Mr. Stanley identified the
emergence of cable television, real estate syndications, equipment leasing,
mutual funds, and high yield bonds as investment trends. Mr. Stanley rose
quickly within CA and became a national production leader. At 30, he
chaired the CA National Field Advisory Board. As the Chair of that Board,
Mr. Stanley brought the interest in technology and creativity that was forged at
GE to CA. CA employed teams consisting of lawyers, accountants and other
financial specialists to support their integrated approach to investment and tax
planning. We believe that Mr. Stanley’s significant background in finance
makes him well qualified to serve on our Board of Directors.
Robert H. Burns was appointed
as an Independent Director of our company on January 22, 2008. He was also
appointed as an Independent Director of Recovery REIT on October 27, 2009.
Mr. Burns is a hotel industry veteran with an international reputation and over
thirty years of hotel, real estate, food and beverage and retail
experience. Mr. Burns founded and built the luxurious Regent International
Hotels brand, which he sold in 1992.
From 1970
to 1992, Mr. Burns served as chairman and chief executive officer of Regent
International Hotels, where he was personally involved in all strategic and
major operating decisions. In this connection, Mr. Burns and his team of
professionals performed site selection, obtained land use and zoning approvals,
performed all property due diligence, financed each project by raising both
equity and arranging debt, oversaw planning, design and construction of each
hotel property, and managed each asset. Each Regent hotel typically
contained a significant food and beverage element and high-end retail component,
frequently including luxury goods such as clothing, jewelry, and well as retail
shops. In fact, Mr. Burns is extremely familiar with the retail landscape
as his flagship hotel in Hong Kong was part of a mixed-use complex anchored by a
major enclosed shopping center connected to the Regent Hong Kong. Thus,
Mr. Burns has over forty (40) years as a manager and principal acquiring,
financing, developing and operating properties.
Mr. Burns
opened the first Regent hotel in Honolulu, Hawaii, in 1970. From 1970 to
1979, the company opened and managed a number of prominent hotels, but gained
truly international recognition in 1980 with the opening of The Regent Hong
Kong, which brought a new dimension in amenities and service to hotels in the
city and attracted attention throughout the world. It was in this way that
the hotel innovatively combined the Eastern standard of service excellence with
the Western standard of luxurious spaces. In all, Mr. Burns developed over
18 major hotel projects including the Four Seasons Hotel in New York City, the
Beverly Wilshire Hotel in Beverly Hills, the Four Seasons Hotel in Milan, Italy,
and the Four Seasons Hotel in Bali, Indonesia.
Mr. Burns
currently serves as Chairman of Barings’ Chrysalis Emerging Markets Fund (since
1991) and as a director of Barings’ Asia Pacific Fund (since 1986).
Additionally, he is a member of the executive committee of the board of
directors of Jazz at Lincoln Center in New York City (since 2000), and chairs
the Robert H. Burns Foundation which he founded in 1992 and which funds the
education of Asian students at American schools. Mr. Burns frequently
lectures at Stanford Business School.
Mr. Burns
was chairman and co-founder of the World Travel and Tourism Council (1994 to
1996), a forum for business leaders in the travel and tourism industry.
With Chief Executives of some one hundred of the world’s leading travel and
tourism companies as its members, WTTC has a unique mandate and overview on all
matters related to travel and tourism. He served as a faculty member at
the University of Hawaii (1963 to 1994) and as president of the Hawaii Hotel
Association (1968 to 1970).
Mr. Burns
began his career in Sheraton’s Executive Training Program in 1958, and advanced
rapidly within Sheraton and then within Westin Hotels (1962 to 1963). He
later spent eight years with Hilton International Hotels (1963 to
1970).
Mr. Burns
graduated from the School of Hotel Management at Michigan State University
(1958), and the University of Michigan’s Graduate School of Business (1960),
after serving three years in the U.S. Army in Korea. For the past 5 years
Mr. Burns has devoted his time to owning and operating Villa Feltrinelli on
Lago di Garda, in Northern Italy, a small, luxury hotel, and working on
developing hotel projects in Asia, focusing on Vietnam and China. We
believe that Mr. Burns’ experience as a real estate developer for over forty
(40) years, during which he developed over eighteen (18) major hotel projects,
make him well qualified to serve as a member of our Board of
Directors.
Compensation
of Directors
We pay to
each of our independent directors a retainer of $25,000 per year, plus $2,000
for each board or board committee meeting the director attends in person ($2,500
for attendance by the chairperson of the audit committee at each meeting of the
audit committee) and $250 for each meeting the director attends by
telephone. In the event there is a meeting of the board and one or more
committees in a single day, the fees will be limited to $2,500 per day ($3,000
for the chairperson of the audit committee if there is a meeting of such
committee). In addition, we have reserved 1,000,000 shares of common stock
for future issuance upon the exercise of stock options that may be granted to
our independent directors pursuant to our stock option plan (described
below). We have granted each of our independent directors options to
purchase 6,000 shares of common stock. Three thousand shares were granted
to them on the date such independent director was elected as a director and an
additional 3,000 were granted at the first annual stockholders meeting.
The independent directors shall receive additional 3,000-share option grants on
the date of each annual meeting of stockholders, each with an exercise price
equal to $10.00 per share during such time as we are offering shares to the
public at $10.00 per share and thereafter at 100% of the then-current fair
market value per share. The independent directors received their second
options to purchase 3,000 shares at the 2009 annual stockholders’ meeting.
The total number of options granted will not exceed 10% of the total outstanding
shares at the time of grant. All directors receive reimbursement of
reasonable out-of-pocket expenses incurred in connection with attendance at
meetings of our board of directors. If a director is also an employee of
American Realty Capital Trust, Inc. or American Realty Capital Advisors, LLC or
their affiliates, we do not pay compensation for services rendered as a
director.
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Fees
Earned or Paid in Cash ($)
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Independent
Directors(2)
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$25,000
yearly retainer; $2,000 for all meetings personally attended by the
directors and $250 for each meeting attended via telephone.(1)
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We
have granted each of our independent directors options to purchase 12,000
shares of common stock. An initial 3,000 options were granted to
them on the date such independent director was elected as a
director. Such options have an exercise price equal to $10.00 per
share and vest after two years from the date of grant Nonqualified options
will be granted on the date of each annual stockholder meeting to purchase
3,000 shares of common stock at $10.00 per share until the termination of
the initial public offering, and thereafter, at fair market value
Accordingly the additional grants of 3,000 options each occurred in
connection with our annual shareholders meetings to
date.
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(1)
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If
there is a board meeting and one or more committee meetings in one day,
the director’s fees shall not exceed $2,500 ($3,000 for the chairperson of
the audit committee if there is a meeting of such
committee).
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(2)
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An
independent director who is also an audit committee chairperson will
receive an additional $500 for personal attendance of all audit committee
meetings.
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Stock
Option Plan
We have
adopted a stock option plan under which our independent directors are eligible
to receive annual nondiscretionary awards of nonqualified stock options.
Our stock option plan is designed to enhance our profitability and value for the
benefit of our stockholders by enabling us to offer independent directors
stock-based incentives, thereby creating a means to raise the level of equity
ownership by such individuals in order to attract, retain and reward such
individuals and strengthen the mutuality of interests between such individuals
and our stockholders.
We have
authorized and reserved 1,000,000 shares of our common stock for issuance under
our stock option plan. The board of directors may make appropriate
adjustments to the number of shares available for awards and the terms of
outstanding awards under our stock option plan to reflect any change in our
capital structure or business, stock dividend, stock split, recapitalization,
reorganization, merger, consolidation or sale of all or substantially all of our
assets.
Our stock
option plan provides for the automatic grant of a nonqualified stock option to
each of our independent directors, without any further action by our board of
directors or the stockholders, to purchase 3,000 shares of our common stock on
the date of each annual stockholder’s meeting. The exercise price for all
stock options granted under our stock option plan will be fixed at $10.00 per
share until the termination of our initial public offering, and thereafter the
exercise price for stock options granted to our independent directors will be
equal to the last sales price reported for a share on the last business day
preceding the annual meeting of stockholders. It is intended that the
exercise price for options granted under our stock option plan will be at least
100% of the fair market value of our common stock as of the date the option is
granted. The term of each such option will be 10 years. Options
granted to non-employee directors will vest and become exercisable on the second
anniversary of the date of grant, provided that the independent director is a
director on the board of directors on that date. As of July 27, 2010, we
have granted the independent directors options to purchase 27,000 shares of
common stock under the stock option plan. Notwithstanding any other
provisions of our stock option plan to the contrary, no stock option issued
pursuant thereto may be exercised if such exercise would jeopardize our status
as a REIT under the Internal Revenue Code. The total number of options
granted will not exceed 10% of the total outstanding shares at the time of
grant.
Restricted
Share Plan
On
January 22, 2010, our Board of Directors adopted our employee and director
incentive restricted share plan. The Board of Directors adopted the plan
to:
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furnish
incentives to individuals chosen to receive restricted shares because they
are considered capable of improving our operations and increasing
profits;
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encourage
selected persons to accept or continue employment with our advisor and its
affiliates; and
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increase
the interest of our employees, officers and directors in our welfare
through their participation in the growth in the value of our common
shares.
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Our
restricted share plan provides for the automatic grant of 3,000 restricted
shares of common stock to each of our independent directors, without any further
action by our board of directors or the stockholders, on the date of each annual
stockholder’s meeting. Restricted stock issued to independent directors
will vest over a five-year period following the first anniversary of the date of
grant in increments of 20% per annum.
Our
employee and director incentive restricted share plan provides us with the
ability to grant awards of restricted shares to our directors, officers and
employees (if we ever have employees), employees of our advisor and its
affiliates, employees of entities that provide services to us, directors of the
advisor or of entities that provide services to us, certain of our consultants
and certain consultants to the advisor and its affiliates or to entities that
provide services to us. The total number of common shares reserved for
issuance under the employee and director incentive restricted share plan is
equal to 2.0% of our authorized shares.
Restricted
share awards entitle the recipient to common shares from us under terms that
provide for vesting over a specified period of time or upon attainment of
pre-established performance objectives. Such awards would typically be
forfeited with respect to the unvested shares upon the termination of the
recipient’s employment or other relationship with us. Restricted shares
may not, in general, be sold or otherwise transferred until restrictions are
removed and the shares have vested. Holders of restricted shares may
receive cash dividends prior to the time that the restrictions on the restricted
shares have lapsed. Any dividends payable in common shares shall be
subject to the same restrictions as the underlying restricted shares. As
of July 27, 2010, we have granted the independent directors 9,000 restricted
shares under the plan. We have also authorized the transfer of 1,500,000
shares of restricted stock to our advisor effective August 16, 2010 for our
advisor to grant to its employees at its discretion.
Compliance
with the American Jobs Creation Act
As part
of our strategy for compensating our independent directors, we have issued, and
we intend to issue, options to purchase our common stock under our independent
directors’ stock option plan, and we intend to issue, restricted share awards
under our employee and director incentive restricted share plan, each of which
is described above. This method of compensating individuals may possibly
be considered to be a “nonqualified deferred compensation plan” under Section
409A of the Internal Revenue Code.
Under
Section 409A, “nonqualified deferred compensation plans” must meet certain
requirements regarding the timing of distributions or payments and the timing of
agreements or elections to defer payments, and must also prohibit any
possibility of acceleration of distributions or payments, as well as certain
other requirements. Stock options with an exercise price that is less than
the fair market value of the underlying stock as of the date of grant would be
considered a “nonqualified deferred compensation plan.” It is intended that the
restricted share awards will not be considered “nonqualified deferred
compensation.”
If
Section 409A applies to any of the awards issued under the plan, or if Section
409A applies to any other arrangement or agreement that we may make, and if such
award, arrangement or agreement does not meet the timing and other requirements
of Section 409A, then (a) all amounts deferred for all taxable years under the
award, arrangement or agreement would be currently includible in the gross
income of the recipient of such award or of such deferred amount to the extent
not subject to a substantial risk of forfeiture and not previously included in
the gross income of the recipient, (b) interest at the underpayment rate plus 1%
would be imposed on the underpayments that would have occurred had the
compensation been includible in income when first deferred (or, if later, when
not subject to a substantial risk of forfeiture) would be imposed upon the
recipient and (c) a 20% additional tax would be imposed on the recipient with
respect to the amounts required to be included in the recipient’s income.
Furthermore, if the affected individual is our employee, we would be required to
withhold federal income taxes on the amount deferred but includible in income
due to Section 409A, although there may be no funds currently being paid to the
individual from which we could withhold such taxes. We would also be
required to report on an appropriate form (W-2 or 1099) amounts which are
deferred, whether or not they meet the requirements of Section 409A, and if we
fail to do so, penalties could apply.
We do not
intend to issue any award, or enter into any agreement or arrangement that would
be considered a “nonqualified deferred compensation plan” under Section 409A,
unless such award, agreement or arrangement complies with the timing and other
requirements of Section 409A. It is our current belief, based upon the
statute, the regulations issued under Section 409A and legislative history, the
options we have granted and that we currently intend to implement and the
restricted share awards that we currently intend to grant will not be subject to
taxation under Section 409A because neither the options nor the restricted share
awards will be considered a “nonqualified deferred compensation plan.”
Nonetheless, there can be no assurances that any options award, agreement or
arrangement which we have entered into will not be affected by Section 409A, or
that any such award, agreement or arrangement will not be subject to income
taxation under Section 409A.
Limited
Liability and Indemnification of Directors, Officers, Employees and Other
Agents
Except as
set forth below, our charter and bylaws limit the personal liability of our
directors and officers to us and our stockholders for monetary damages and
require us to indemnify and pay or reimburse the reasonable expenses in advance
of final disposition of a proceeding to:
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any
individual who is a present or former director or officer of the company
and who is made or threatened to be made a party to the proceeding by
reason of his or her service in that
capacity;
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any
individual who, while a director or officer of the company and at the
request of the company, serves or has served as a director, officer,
partner, or trustee of another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made or threatened to be made a party to the
proceeding by reason of his or her service in that capacity;
and
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our
advisor and of any of its affiliates, acting as an agent of the
company.
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Our
charter provides that a director, our advisor or any of its affiliates will be
indemnified by us for losses suffered by it and held harmless for losses
suffered by us only if all of the following conditions are met:
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the
director, our advisor or its affiliate has determined, in good faith, that
the course of conduct which caused the loss or liability was in our best
interest;
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the
director, our advisor or its affiliate was acting on our behalf or
performing services for us; and
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the
liability or loss was not the result of (A) negligence or misconduct by
the director (other than an independent director), our advisor or its
affiliate or (B) gross negligence or willful misconduct by an independent
director.
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In
addition, any indemnification or any agreement to hold harmless is recoverable
only out of our assets and not from the stockholders. Indemnification
could reduce the legal remedies available to us and the stockholders against the
indemnified individuals.
This
provision does not reduce the exposure of directors and officers to liability
under federal or state securities laws, nor does it limit the stockholder’s
ability to obtain injunctive relief or other equitable remedies for a violation
of a director’s or an officer’s duties to us or our stockholders, although the
equitable remedies may not be an effective remedy in some
circumstances.
Our
charter also prohibits us from providing indemnification for losses and
liabilities arising from alleged violations of federal or state securities laws
unless one or more of the following conditions are met:
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there
has been a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular
indemnitee;
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such
claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee;
or
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a
court of competent jurisdiction approves a settlement of the claims
against a particular indemnitee and finds that indemnification of the
settlement and the related costs should be made, and the court considering
the request for indemnification has been advised of the position of the
SEC and of the published position of any state securities regulatory
authority in which securities of us were offered or sold as to
indemnification for violation of securities
laws.
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Our
charter further prohibits us from paying or reimbursing the reasonable legal
expenses and other costs incurred by a director, our advisor or any affiliate of
our advisor, in advance of final disposition of a proceeding,
unless:
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the
proceeding relates to acts or omissions with respect to the performance of
duties or services on our behalf;
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the
director, our advisor or its affiliate provides us with a written
affirmation of his, her or its good faith belief that he, she or it has
met the standard of conduct necessary for
indemnification;
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the
proceeding was initiated by a third party who is not a stockholder or, if
initiated by a stockholder acting in his or her capacity as such, a court
of competent jurisdiction approves such reimbursement or advancement of
expenses; and
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the
director, our advisor or its affiliate provides us with a written
undertaking to repay the amount paid or reimbursed by us, together with
the applicable legal rate of interest if it is ultimately determined that
the director, our advisor or its affiliate did not comply with the
requisite standard of conduct.
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Provided
the above conditions are met, we have also agreed to indemnify and hold harmless
our advisor and its affiliates performing services for us from any loss or
liability arising out of the performance of its/their obligations under the
advisory agreement. As a result, we and our stockholders may be entitled
to a more limited right of action than we and you would otherwise have if these
indemnification rights were not included in the charter and bylaws or the
advisory agreement.
In
addition to the limitations imposed by our charter, Maryland law provides that a
Maryland corporation may not limit the liability of directors and officers to
the corporation and its stockholders if such liability results from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment and which is
material to the cause of action.
Maryland
law also allows directors and officers to be indemnified against judgments,
penalties, fines, settlements and expenses actually incurred in a proceeding
unless the following can be established:
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the
act or omission of the director or officer was material to the cause of
action adjudicated in the proceeding and was committed in bad faith or was
the result of active and deliberate
dishonesty;
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the
director or officer actually received an improper personal benefit in
money, property or services; or
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with
respect to any criminal proceeding, the director or officer had reasonable
cause to believe his or her act or omission was
unlawful.
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We have
been informed that the SEC and some states’ securities commissions take the
position that indemnification against liabilities arising under the Securities
Act is against public policy and unenforceable.
The
general effect to investors of any arrangement under which any controlling
person, director or officer of us is insured or indemnified against liability is
a potential reduction in distributions resulting from our payment of premiums
associated with insurance. In addition, indemnification could reduce the
legal remedies available to us and our stockholders against the officers and
directors.
The
Advisor
Our
advisor is American Realty Capital Advisors, LLC. Our officers and two of
our directors also are officers, key personnel and/or members of American Realty
Capital Advisors, LLC. American Realty Capital Advisors, LLC has
contractual responsibility to us and our stockholders pursuant to the advisory
agreement. American Realty Capital Advisors, LLC is indirectly
wholly-owned and controlled by Messrs. Schorsch and Kahane and certain
other executives.
The
officers and key personnel of our advisor are as follows:
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Nicholas
S. Schorsch
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Chief
Executive Officer
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William
M. Kahane
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President,
Chief Operating Officer and Treasurer
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Peter
M. Budko
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Executive
Vice President and Chief Investment Officer
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Brian
S. Block
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Executive
Vice President and Chief Financial Officer
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Edward
M. Weil, Jr.
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Executive
Vice President and Secretary
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Louisa
Quarto
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Senior
Vice President
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The
backgrounds of Messrs. Schorsch, Kahane, Budko, Block and Weil are described in
the “Management — Executive Officers and Directors” section of this
prospectus. The background of Ms Quarto is described in the “Management —
Affiliated Companies — Dealer Manager” section of this prospectus.
In
addition to the directors and key personnel listed above, American Realty
Capital Advisors, LLC employs personnel who have extensive experience in
selecting and managing commercial properties similar to the properties sought to
be acquired by us. As of the date of this prospectus our advisor is the
sole limited partner of American Realty Capital Operating Partnership,
L.P.
The
Advisory Agreement
Many of
the services to be performed by American Realty Capital Advisors, LLC in
managing our day-to-day activities are summarized below. This summary is
provided to illustrate the material functions that we expect American Realty
Capital Advisors, LLC will perform for us as our advisor, and it is not intended
to include all of the services that may be provided to us by third
parties. Under the terms of the advisory agreement, American Realty
Capital Advisors, LLC will undertake to use its commercially reasonable best
efforts to present to us investment opportunities consistent with our investment
policies and objectives as adopted by our board of directors. In its
performance of this undertaking, American Realty Capital Advisors, LLC, either
directly or indirectly by engaging an affiliate, shall, among other duties and
subject to the authority of our board of directors:
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find,
evaluate, present and recommend to us investment opportunities consistent
with our investment policies and
objectives;
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serve
as our investment and financial advisor and provide research and economic
and statistical data in connection with our assets and our investment
policies;
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provide
the daily management and perform and supervise the various administrative
functions reasonably necessary for our management and
operations;
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investigate,
select, and, on our behalf, engage and conduct business with such third
parties as the advisor deems necessary to the proper performance of its
obligations under the advisory
agreement;
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consult
with our officers and board of directors and assist the board of directors
in the formulating and implementing of our financial
policies;
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structure
and negotiate the terms and conditions of our real estate acquisitions,
sales or joint ventures;
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review
and analyze each property’s operating and capital
budget;
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acquire
properties and make investments on our behalf in compliance with our
investment objectives and policies;
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survey
local brokers and agents to determine market rates fees charged by
management and leasing companies for similar services provided by the
property manager;
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arrange,
structure and negotiate financing and refinancing of
properties;
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enter
into leases of property and service contracts for assets and, to the
extent necessary, perform all other operational functions for the
maintenance and administration of such assets, including the servicing of
mortgages; and
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prepare
and review on our behalf, with the participation of one designated
principal executive officer and principal financial officer, all reports
and returns required by the Securities and Exchange Commission, Internal
Revenue Service and other state or federal governmental
agencies.
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The
advisor may not acquire any property with a purchase price that is equal to or
greater than $15,000,000 or finance any such acquisition, on our behalf, without
the prior approval of a majority of our board of directors. The actual
terms and conditions of transactions involving investments in such properties
will be determined in the sole discretion of the advisor, subject at all times
to such board of directors approval. Conversely, the advisor may acquire
any real property with purchase price that is lower than $15,000,000, or finance
any such acquisition, on our behalf, without the prior approval of the board of
directors (unless the purchase is from an affiliate, in which case the
independent directors shall approve the purchase), if the following conditions
are satisfied: (a) the investment in the property would not, if
consummated, violate our investment guidelines, (b) the investment in the
property would not, if consummated, violate any restrictions on indebtedness;
and (c) the consideration to be paid for such properties does not exceed the
fair market value of such properties, as determined by a qualified independent
real estate appraiser selected by the advisor.
The
advisory agreement has a one-year term ending January 25, 2011, and may be
renewed for an unlimited number of successive one-year periods.
Additionally, either party may terminate the advisory agreement without penalty
immediately upon a change of control of us, or upon 60 days’ written notice
without penalty. If we elect to terminate the agreement, we must obtain
the approval of a majority of our independent directors. In the event of
the termination of our advisory agreement, our advisor is required to cooperate
with us and take all reasonable steps requested by us to assist our board of
directors in making an orderly transition of the advisory function. On
June 2, 2010, we and American Realty Capital Operating Partnership, L.P. entered
into an amended and restated advisory agreement with American Realty Capital
Advisors, LLC which amended the advisory agreement to provide that in the event
our Board of Directors decides to internalize any management services provided
by American Realty Capital Advisors, LLC, neither we nor American Realty Capital
Operating Partnership, L.P. will pay any compensation to American Realty Capital
Advisors, LLC or its affiliates in connection with the internalization
transaction.
We pay
American Realty Capital Advisors, LLC a yearly asset management fee equal to 1%
of the gross purchase price of our assets. We also pay American Realty
Capital Advisors, LLC acquisition fees equal to 1% of the gross purchase price
of each property or asset that we acquire, along with reimbursement of
acquisition expenses. We also pay to American Realty Capital Advisors, LLC
a finance coordination fee equal to 1% of the amount available and/or
outstanding under any debt financing that we obtain and use for the acquisition
of properties and other investments or that is assumed, directly or indirectly,
in connection with the acquisition of properties.
Additionally,
we are required to pay to American Realty Capital II, LLC or American Realty
Capital II, LLC fees based on a percentage of proceeds or stock value upon our
sale of assets or the listing of our common stock on the New York Stock Exchange
or NASDAQ Stock Market, but only if, in the case of our sale of assets, our
investors have received a return of their net capital (original share purchase
price reduced by prior distributions of proceeds from the sale or refinancing of
REIT assets) invested and an 6% annual cumulative, non-compounded return or, in
the case of the listing of our common stock, the market value of our common
stock plus the distributions paid to our investors exceeds the sum of the total
amount of capital raised from investors plus the amount of cash flow necessary
to generate an 6% annual cumulative, non-compounded return to investors.
Upon termination of the advisory agreement, we may be required to pay to
American Realty Capital Advisors, LLC or American Realty Capital II, LLC a
similar performance fee if American Realty Capital Advisors, LLC would have been
entitled to a subordinated participation in net sale proceeds had the portfolio
been liquidated (based on an independent appraised value of the portfolio) on
the date of termination. As agreed with the Ohio Division of Securities in
connection with the qualification of the initial offering in that state, the
advisor and the Company have agreed that any subordinated listing fee or
termination payments due to the advisor will only be paid when assets acquired
during the period that the advisor was entitled to such payments are sold or
refinanced. The payment of such subordinated listing fee or termination
fee will be paid by the issuance of a non-interest bearing, non-transferable
promissory note in the amount of such fee. The note will be payable as the
subject assets are sold or refinanced. In the event that the note is not
paid in full in three years after issuance and the Company is listed, the note
is convertible at the option of the advisor into shares of the Company’s common
stock.
For
substantial assistance in connection with the sale of properties (as determined
by a majority of the independent directors), the advisor or its affiliates shall
receive an amount equal to up to one-half of the brokerage commission paid on
the sale of property, not to exceed 3% of the contract price of each property
sold; provided, however, in no event may the real estate commissions paid to our
advisor, its affiliates and unaffiliated third parties exceed 6% of the contract
sales price. Notwithstanding anything to the contrary herein, no such fee
shall be payable to the advisor or its affiliate for property sales if such
sales involve the Company selling all or substantially all of its properties in
one or more transactions designed to effectuate a business combination
transaction (bringing together the Company and the operating partnership and one
or more incorporated or unincorporated businesses into a single company that
then carries on the activities of the separate combined entities, as opposed to
a Company liquidation, in which case such fees would be payable if the advisor
or an affiliate provides a substantial amount of assistance as provided
above).
American
Realty Capital Advisors, LLC and its officers, employees and affiliates engage
in other business ventures and, as a result, their resources are not dedicated
exclusively to our business. However, pursuant to the advisory agreement,
American Realty Capital Advisors, LLC is required to devote sufficient resources
to our administration to discharge its obligations. American Realty
Capital Advisors, LLC currently has approximately 43 paid employees as of July
27, 2010. However, certain of these employees may dedicate a portion of
his or her time providing services to affiliates of our advisor. Our
advisor is responsible for a pro rata portion of each employee’s compensation
based upon the approximate percentage of time the employee dedicates to our
advisor. American Realty Capital Advisors, LLC may assign the advisory
agreement to an affiliate upon approval of a majority of our independent
directors. We may assign or transfer the advisory agreement to a successor
entity; provided that at least a majority of our independent directors
determines that any such successor advisor possesses sufficient qualifications
to perform the advisory function and to justify the compensation payable to the
advisor. Our independent directors will base their determination on the
general facts and circumstances that they deem applicable, including the overall
experience and specific industry experience of the successor advisor and its
management. Other factors that will be considered are the compensation to
be paid to the successor advisor and any potential conflicts of interest that
may occur.
The fees
payable to American Realty Capital Advisors, LLC or its affiliates under the
advisory agreement are described in further detail in the section captioned
“Management Compensation” below. We also describe in that section our
obligation to reimburse American Realty Capital Advisors, LLC for organization
and offering expenses, administrative and management services, and payments made
by American Realty Capital Advisors, LLC to third parties in connection with
potential acquisitions.
Affiliated
Companies
American
Realty Capital II, LLC
Upon
termination of the Advisory Agreement, American Realty Capital II, LLC may be
entitled to a performance fee if American Realty Capital II, LLC would have been
entitled to a subordinated participation in net sale proceeds had the portfolio
been liquidated (based on an independent appraised value of the portfolio) on
the date of termination. Under our charter, we could not increase these
success-based fees without the approval of a majority of our independent
directors, and any increase in the subordinated participation in net sale
proceeds would have to be reasonable. Our charter provides that such
incentive fee is “presumptively reasonable” if it does not exceed 15% of the
balance of such net proceeds remaining after investors have received a return of
their net capital contributions and an 6% per year cumulative, non-compounded
return.
American
Realty Capital II, LLC cannot earn both the subordinated participation in net
sale proceeds and the subordinated incentive listing fee. As agreed with
the Ohio Division of Securities in connection with the qualification of the
initial offering in that state, the advisor and the Company have agreed that any
subordinated listing fee or termination payments due to the advisor will only be
paid when assets acquired during the period that the advisor was entitled to
such payments are sold or refinanced. The payment of such subordinated
listing fee or termination fee will be paid by the issuance of a non-interest
bearing, non-transferable promissory note in the amount of such fee. The note
will be payable as the subject assets are sold or refinanced. In the event
that the note is not paid in full in three years after issuance and the Company
is listed, the note is convertible at the option of the advisor into shares of
the Company’s common stock. If shares are used for payment, we do not
anticipate that they will be registered under the Securities Act and, therefore,
will be subject to restrictions on transferability. Any portion of the
subordinated participation in net sale proceeds that American Realty Capital II,
LLC receives prior to our listing will offset the amount otherwise due pursuant
to the subordinated incentive listing fee. Furthermore, any previous
payments of the subordinated participation in net sale proceeds will offset the
amounts due pursuant to the subordinated incentive listing fee, and we will not
be required to pay American Realty Capital Advisors, LLC any further
subordinated participation in net sale proceeds. In no event will the
amount paid to American Realty Capital II, LLC under the promissory note, if
any, exceed the amount considered presumptively reasonable by the NASAA REIT
Guidelines.
If at any
time the shares become listed on the New York Stock Exchange or NASDAQ Stock
Market, we will negotiate in good faith with American Realty Capital II, LLC a
fee structure appropriate for an entity with a perpetual life. Our
independent directors must approve the new fee structure negotiated with
American Realty Capital II, LLC. The market value of our outstanding stock
will be calculated based on the average market value of the shares issued and
outstanding at listing over the 30 trading days beginning 180 days after the
shares are first listed or included for quotation.
Property
Manager
Our
properties are managed and leased initially by American Realty Capital
Properties, LLC, our property manager. American Realty Capital Properties,
LLC is indirectly wholly-owned and controlled by Messrs. Schorsch and
Kahane. Nicholas S. Schorsch serves as chief executive officer of
American Realty Capital Properties, LLC. William M. Kahane serves as its
president and treasurer. Peter M. Budko serves as Executive Vice President
and Chief Investment Officer of American Realty Capital Properties, LLC.
Brian S. Block serves as Executive Vice President and Chief Financial Officer of
American Realty Capital Properties, LLC. Edward M. Weil, Jr. serves as
Executive Vice President and Secretary of American Realty Capital Properties,
LLC. See the “Conflicts of Interest” section of this
prospectus.
American
Realty Capital Properties, LLC was organized in 2007 to lease and manage
properties that we or our affiliated entities acquire. In accordance with
the property management and leasing agreement, we pay to American Realty Capital
Properties, LLC a property management fee (a) 2% of gross revenues from our
single tenant properties and (b) 4% of gross revenues from our multi-tenant
properties. In addition, we pay leasing commissions to American Realty
Capital Properties, LLC based upon the customary leasing commission applicable
to the geographic location of the property; provided however, that the aggregate
of all property management and leasing fees paid to the property manager plus
all payments to third parties may not exceed the amount that other nonaffiliated
management and leasing companies generally charge for similar services in the
same geographic location. American Realty Capital Properties, LLC derives
substantially all of its income from the property management and leasing
services it performs for us and other American Realty Capital-sponsored
programs.
The
company intends to build a portfolio comprised almost entirely of triple-net
(NNN)(1) and
double-net (NN)(2) leased
real estate. Given the terms of these leases, tenant improvements will
almost always be the responsibility of the tenant. There may be limited
circumstances where tenant improvements become the landlord’s responsibility,
e.g., Governmental Services Administration (GSA) leases, at which point the
property manager will have to seek approval from our advisors on our behalf
pursuant to the terms of the Advisory Agreement prior to providing tenant
improvement services. In the event that American Realty Capital
Properties, LLC assists a tenant with tenant improvements, a separate fee may be
charged to, and payable by, us. This fee will not exceed 5% of the cost of
the tenant improvements. The property manager will only provide these
services if it does not cause any of our income from the applicable property to
be treated as other than rents from real property for purposes of the applicable
REIT requirements described under “Material U.S. Federal Income Tax
Considerations” below.
The
property management agreement among American Realty Capital Operating
Partnership, L.P., American Realty Capital Trust, Inc. and American Realty
Capital Properties, LLC has a one-year term ending January 25, 2011, and is
subject to successive one-year renewals unless American Realty Capital
Properties, LLC provides written notice of its intent to terminate 30 days’
prior to the expiration of the initial or renewal term. We may also
terminate the agreement upon 30 days’ prior written notice in the event of
negligence or misconduct by the property manager.
American
Realty Capital Properties, LLC hires, directs and establishes policies for
employees who have direct responsibility for the operations of each property we
acquire, which may include, but is not be limited to, on-site managers and
building and maintenance personnel. Certain employees of the property
manager may be employed on a part-time basis and also may be employed by our
advisor or certain companies affiliated with it.
The
property manager also directs the purchase of equipment and supplies, and
supervises all maintenance activity, for our properties. The management
fees paid to the property manager cover, without additional expense to us, all
of the property manager’s general overhead costs. The principal office of
the property manager is located at 106 Old York Road, Jenkintown, PA
19046.
Dealer
Manager
Realty
Capital Securities, LLC, our dealer manager, is a member firm of the Financial
Industry Regulatory Authority (FINRA). Realty Capital Securities, LLC was
organized on August 29, 2007 for the purpose of participating in and
facilitating the distribution of securities of real estate programs sponsored by
American Realty Capital Trust, Inc., its affiliates and its
predecessors.
Realty
Capital Securities, LLC provides certain wholesaling, sales, promotional and
marketing assistance services to us in connection with the distribution of the
shares offered pursuant to this prospectus. It may also sell a limited
number of shares at the retail level. The compensation we will pay to
Realty Capital Securities, LLC in connection with this offering is described in
the section of this prospectus captioned “Management Compensation.” See also
“Plan of Distribution — Compensation We Will Pay for the Sale of Our
Shares.”
Realty
Capital Securities, LLC is controlled by Messrs. Schorsch and Kahane and
certain other officers. Realty Capital Securities, LLC is an affiliate of
both our advisor and the property manager. See “Conflicts of
Interest.”
The
current officers of Realty Capital Securities, LLC are:
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Louisa
Quarto
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President
and Secretary
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Kamal
Jafarnia
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Executive
Vice President and Chief Compliance Officer
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Alex
MacGillivray
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Senior
Vice President and National Sales
Manager
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1
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Triple-net
leases typically require the tenant to pay all costs associated with a
property in addition to the base rent and percentage rent, if
any.
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2
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Double-net
leases typically have the landlord responsible for the roof and structure,
or other aspects of the property, while the tenant is responsible for all
remaining expenses associated with the
property.
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The
backgrounds of Messrs. Jafarnia and MacGillivray and Ms. Quarto are described
below:
Louisa Quarto joined Realty
Capital Securities, LLC in April 2008 and currently serves as President.
Ms Quarto served as Chief Compliance Officer for Realty Capital Securities, LLC
from May 2008 until February 2009. Ms Quarto’s responsibilities include
overseeing national accounts, operations and compliance activities for Realty
Capital Securities. From February 1996 through April 2008 Ms Quarto was
with W. P. Carey & Co. LLC, most recently as Executive Director and Chief
Management Officer of Carey Financial, LLC, the broker-dealer subsidiary of W.
P. Carey, where she managed relationships with the broker-dealers that were part
of the CPA® REIT selling groups. Ms Quarto earned a Bachelor of Arts from
Bucknell University and an MBA in Finance and Marketing from The Stern School of
Business at New York University. She holds FINRA Series 7, 63 and 24
licenses and is a member of the Investment Program Association’s, or IPA,
Executive Committee, its Board of Trustees and serves as the IPA’s Treasurer and
Chair of its Finance Committee.
Kamal Jafarnia is Executive
Vice President and Chief Compliance Officer for Realty Capital Securities, LLC
and is Senior Vice President for American Realty Capital. Mr. Jafarnia
joined Realty Capital Securities, LLC in November 2008 and became its Chief
Compliance Officer in February 2009. Mr. Jafarnia has more than 15 years
experience both as an attorney and as a compliance professional, including 10
years of related industry experience in financial services. Before joining
American Realty Capital, he served as Executive Vice President of Franklin
Square Capital Partners and as Chief Compliance Officer of FB Income Advisor,
LLC, the registered investment advisor to Franklin Square’s proprietary
offering, where he was responsible for overseeing the regulatory compliance
programs for the firm. Prior to Franklin Square Capital Partners, Mr.
Jafarnia was Assistant General Counsel and Chief Compliance Officer for
Behringer Harvard and Behringer Securities, LP, respectively, where he
coordinated the selling group due diligence and oversaw the regulatory
compliance efforts. Prior to Behringer Harvard, Mr. Jafarnia worked as
Vice President of CNL Capital Markets, Inc. and Chief Compliance Officer of CNL
Fund Advisors, Inc. Mr. Jafarnia earned a Bachelor of Arts from the
University of Texas at Austin and his law degree from Temple University School
of Law in Philadelphia, PA. He is currently participating in the Masters
of Laws degree program in Securities and Finance Regulation at the Georgetown
University Law Center in Washington, DC. Mr. Jafarnia holds FINRA Series 6, 7,
24, 63 and 65 licenses.
Alex MacGillivray joined
Realty Capital Securities, LLC in June 2009 and currently serves as Senior Vice
President and National Sales Manager. Mr. MacGillivray has over 20 years
of sales experience and his current responsibilities include sales, marketing,
and managing the distribution of all products offered by Realty Capital
Securities, LLC. Prior to joining Realty Capital Securities, LLC, he was a
Director of Sales at Prudential Financial with responsibility for managing a
team focused on variable annuity sales through numerous channels. Before
joining Prudential Financial in 2006, he was a National Sales Manager at Lincoln
Financial overseeing a team focused on variable annuity sales. Before
joining Lincoln Financial in 2003, he was a senior sales executive at
AXA/Equitable. Mr. MacGillivray also has prior sales experience at
Fidelity Investments and Van Kampen Merritt. Mr. MacGillivray holds FINRA
Series 7, 24 and 63 licenses.
Investment
Decisions
The
primary responsibility for the investment decisions of American Realty Capital
Advisors, LLC and its affiliates, the negotiation for these investments, and the
property management and leasing of these investment properties resides with
Nicholas S. Schorsch, William M. Kahane, Peter M. Budko, Brian S. Block and
Edward M. Weil, Jr. American Realty Capital Advisors, LLC seeks to invest in
commercial properties on our behalf that satisfy our investment
objectives. To the extent we invest in properties, a majority of the
directors will approve the consideration paid for such properties based on the
fair market value of the properties. If a majority of independent
directors so determines, or if an asset is acquired from our advisor, one or
more of our directors, our sponsor or any of their affiliates, the fair market
value will be determined by a qualified independent real estate appraiser
selected by the independent directors. In addition, the advisor may
purchase on our account, without the prior approval of the board of directors,
properties whose purchase price is less than $15,000,000 (unless the purchase is
from an affiliate, in which case the independent directors shall approve the
purchase), if the following conditions are satisfied:
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The
investment in the property would not, if consummated, violate our
investment guidelines;
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The
investment in the property would not, if consummated, violate any
restrictions on indebtedness; and
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The
consideration to be paid for such properties does not exceed the fair
market value of such properties, as determined by a qualified independent
real estate appraiser selected by the advisor and acceptable to the
independent directors.
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Appraisals
are estimates of value and should not be relied on as measures of true worth or
realizable value. We will maintain the appraisal in our records for at
least five years, and copies of each appraisal will be available for review by
stockholders upon their request.
Effective
March 31, 2009, the Board of Directors approved the recommendation of the
officers of the Company that the Company not pursue any opportunities to acquire
real property from an entity affiliated with its advisor, American Realty
Capital Advisors, LLC. On March 9, 2010, the Board of Directors of the
Company approved the recommendation of the officers of the Company that the
Company continue not to pursue any opportunities to acquire real property from
an entity affiliated with its advisor. The Board of Directors determined
that this practice will remain in effect during the remaining term of the
initial offering and the follow-on offering.
Certain
Relationships and Related Transactions
Advisory Agreement We have
entered into an Advisory Agreement with American Realty Capital Advisors, LLC,
whereby American Realty Capital Advisors, LLC will manage our day-to-day
operations. In return, we will pay to American Realty Capital Advisors,
LLC an asset management fee equal to 1% of the gross purchase price of our
assets. We also will pay to American Realty Capital Advisors, LLC 1% of
the gross purchase price of each property or asset that we acquire, as an
acquisition fee, along with reimbursement of acquisition expenses. We also
will pay to American Realty Capital Advisors, LLC a financing coordination fee
equal to 1% of the amount available under any debt financing that we obtain and
use for the acquisition of properties and other investments. Additionally,
we will be required to pay to American Realty Capital Advisors, LLC or its
affiliates fees based on a percentage of proceeds or stock value upon our sale
of assets or the listing of our common stock on the New York Stock Exchange or
The Nasdaq Stock Market, but only if, in the case of our sale of assets, our
investors have received a return of their net capital invested and an 6% annual
cumulative, non-compounded return or, in the case of the listing or quotation of
our common stock, the market value of our common stock plus the distributions
paid to our investors exceeds the sum of the total amount of capital raised from
investors plus the amount of cash flow necessary to generate an 6% annual
cumulative, non-compounded return to investors, and such fee will be paid by the
issuance of a non-interest bearing, non-transferable promissory note in the
amount of such fee. For substantial assistance in connection with the sale
of properties (as determined by a majority of the independent directors), the
advisor or its affiliates shall receive an amount equal to up to one-half of the
brokerage commission paid on the sale of property, not to exceed 3% of the
contract price of each property sold; provided, however, in no event may the
real estate commissions paid to our advisor, its affiliates and unaffiliated
third parties exceed 6% of the contract sales price. Notwithstanding
anything to the contrary herein, no such fee shall be payable to the advisor or
its affiliate for property sales if such sales involve the Company selling all
or substantially all of its properties in one or more transactions designed to
effectuate a business combination transaction (bringing together the Company and
the operating partnership and one or more incorporated or unincorporated
businesses into a single company that then carries on the activities of the
separate combined entities, as opposed to a Company liquidation, in which case
such fees would be payable if the advisor or an affiliate provides a substantial
amount of assistance as provided above).
Nicholas
S. Schorsch, our chief executive officer and chairman of our board of
directors. Mr. Schorsch also is the chief executive officer of American
Realty Capital Advisors, LLC. William M. Kahane, our President, Chief
Operating Officer and Treasurer is the President, Chief Operating Officer and
Treasurer of American Realty Capital Advisors, LLC. Along with certain
executives, Mr. Schorsch and Mr. Kahane are indirect owners of American Realty
Capital Advisors, LLC. Peter M. Budko, our executive vice president and
chief investment officer, is the executive vice president and chief investment
officer of American Realty Capital Advisors, LLC. Brian S. Block, our executive
vice president and chief financial officer, is the senior vice president and
chief financial officer of American Realty Capital Advisors, LLC. Edward M.
Weil, Jr., our executive vice president and secretary is the executive vice
president and secretary of American Realty Capital Advisors, LLC. For a
further description of this agreement, see “Management — The Advisory Agreement”
and “Management Compensation.” See also “Conflicts of Interest.”
Property Management Agreement.
We entered into a Property Management Agreement with American Realty
Capital Properties, LLC. We will pay to American Realty Capital
Properties, LLC fees equal to (a) 2.0% from our single tenant properties and (b)
4% of the gross revenues from our multi-tenant properties. In addition, we
will pay leasing commissions to American Realty Capital Properties, LLC based
upon the customary leasing commissions applicable to the geographic location of
the property, subject to certain limits. Nicholas S. Schorsch, our chief
executive officer and chairman of our board of directors, is the chief executive
officer of American Realty Capital Properties, LLC. William M. Kahane, our
President, Chief Operating Officer and Treasurer is the President, Chief
Operating Officer and Treasurer of American Realty Capital Properties,
LLC. Mr. Schorsch and Mr. Kahane are indirect owners of American
Realty Capital Properties, LLC. Peter M. Budko, our executive vice
president and chief investment officer, is the executive vice president and
chief investment officer of American Realty Capital Properties, LLC. Brian
S. Block, our executive vice president and chief financial officer, is the
senior vice president and chief financial officer of American Realty Capital
Properties, LLC. Edward M. Weil, Jr., our executive vice president and
secretary is the executive vice president and secretary of American Realty
Capital Properties, LLC. For a further description of this agreement, see
“Management — Affiliated Companies — Property Manager” and “Management
Compensation.” See also “Conflicts of Interest.”
Dealer Manager Agreement.
We entered into a Dealer Manager Agreement with Realty Capital
Securities, LLC, our dealer manager. We will pay to Realty Capital
Securities, LLC 7% of the gross offering proceeds from this offering.
Realty Capital Securities, LLC may reallow all of the selling commission to
participating broker-dealers. Realty Capital Securities, LLC also will
waive the selling commission with respect to shares sold by an investment
advisory representative. Additionally, we will pay to Realty Capital
Securities, LLC a dealer manager fee equal to 3% of the gross offering proceeds
sold through broker-dealers. Realty Capital Securities, LLC may reallow
all or part of the dealer manager fee to participating broker-dealers.
Nicholas S. Schorsch, our chief executive officer and a member of our board of
directors, indirectly and together with Mr. Kahane owns a majority of the
ownership and voting interests of Realty Capital Securities, LLC. William
M. Kahane, our president and a member of our board of directors, indirectly and
together with Mr. Schorsch owns a majority of the ownership and voting interests
of Realty Capital Securities, LLC. Louisa Quarto and Bradford Watt are the
co-presidents and secretaries of Realty Capital Securities, LLC. For a
further description of this agreement, see “Management — Affiliated Companies —
Dealer Manager,” “Management Compensation” and “Plan of Distribution.” See also
“Conflicts of Interest.”
American Realty Capital II,
LLC. Upon termination of the Advisory Agreement, American Realty
Capital II, LLC may be entitled to a performance fee if American Realty Capital
II, LLC would have been entitled to a subordinated participation in net sale
proceeds had the portfolio been liquidated (based on an independent appraised
value of the portfolio) on the date of termination. Under our charter, we
could not increase these success-based fees without the approval of a majority
of our independent directors, and any increase in the subordinated participation
in net sale proceeds would have to be reasonable. Our charter provides
that such incentive fee is “presumptively reasonable” if it does not exceed 15%
of the balance of such net proceeds remaining after investors have received a
return of their net capital contributions and an 6% per year cumulative,
non-compounded return. The payment of these fees to American Realty
Capital II, LLC is related to our successful performance because of the fact
that American Realty Capital II, LLC would receive this fee only if it is
entitled to a subordinated participation in the net proceeds at the liquidation
of the portfolio. The “subordinated participation in net sale proceeds,”
also known as the “promote,” is a success-based performance fee. It is
meant to motivate the advisor to obtain the highest possible selling price for
the property. The fee is calculated as 15% of the remaining net sale
proceeds after the investors have received a return of their net capital
invested and a 6% annual cumulative, non-compounded return. If the advisor
does not succeed in achieving a purchase price that would result in an annual
cumulative non-compounded return greater than 6%, then the advisor would not
earn this incentive fee. As agreed with the Ohio Division of Securities in
connection with the qualification of the offering in that state, the advisor and
the Company have agreed that any subordinated listing fee or termination
payments due to the advisor will only be paid when assets acquired during the
period that the advisor was entitled to such payments are sold or
refinanced. The payment of such subordinated listing fee or termination
fee will be paid by the issuance of a non-interest bearing, non-transferable
promissory note in the amount of such fee. The note will be payable as the
subject assets are sold or refinanced. In the event that the note is not
paid in full in three years after issuance and the Company is listed, the note
is convertible at the option of the advisor into shares of the Company’s common
stock.
American Realty Capital Exchange,
LLC. American Realty Capital Exchange, LLC (“ARCX”) is a subsidiary
of American Realty Capital Advisors, LLC (the “Advisor”). Persons selling
real estate held for investment often seek to reinvest the proceeds of that sale
in another real estate investment in an effort to obtain favorable tax treatment
under Section 1031 of the Internal Revenue Code. As a result of demand in
the marketplace for this type of offering, our Advisor has developed a program
to facilitate these transactions, referred to as like-kind exchanges. ARCX
will acquire real estate to be owned in co-tenancy arrangements with persons
desiring to engage in such like-kind exchanges (“1031 Participants”). ARCX
will acquire the subject property or portfolio of properties and, either
concurrently with or following such acquisition, prepare and market a private
placement memorandum for the sale of co-tenancy interests in that
property. See
“Section 1031 Exchange Program” within the prospectus. To date, we
have engaged in four Section 1031 Programs raising aggregate gross proceeds
of $10,080,802.
MANAGEMENT
COMPENSATION
We have
no paid employees. American Realty Capital Advisors, LLC, our advisor, and
its affiliates manages our day-to-day affairs. The following table
summarizes all of the compensation and fees we pay in our initial offering and
follow-on offering to American Realty Capital Advisors, LLC and its affiliates,
including amounts to reimburse their costs in providing services. The
selling commissions may vary for different categories of purchasers. See
“Plan of Distribution.” This table assumes the shares are sold through
distribution channels associated with the highest possible selling commissions
and dealer manager fee.
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for Initial Offering and Follow-On Offering
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Selling Commissions —
Realty Capital Securities, LLC(3)
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We
will pay to Realty Capital Securities, LLC 7% of the gross offering
proceeds before reallowance of commissions earned by participating
broker-dealers. Realty Capital Securities, LLC, our dealer manager,
will reallow 100% of commissions earned to participating
broker-dealers.
|
|
$18,373,000
|
|
|
$105,000,000
|
|
|
$24,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer Manager Fee —
Realty Capital Securities, LLC(3)
|
|
We
will pay to Realty Capital Securities, LLC 3% of the gross offering
proceeds before reallowance to participating broker-dealers. Realty
Capital Securities, LLC may reallow all or a portion of its dealer manager
fee to participating broker-dealers. See “Plan of
Distribution.”
|
|
$8,441,000
|
|
|
$45,000,000
|
|
|
$10,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursement of
Other Organization and Offering Expenses — American Realty Capital
Advisors, LLC(4)
|
|
We
will reimburse American Realty Capital Advisors, LLC up to 1.5% of our
gross offering proceeds. American Realty Capital Advisors, LLC will
incur or pay our organization and offering expenses (excluding selling
commissions and the dealer manager fee). We will then reimburse
American Realty Capital Advisors, LLC for these amounts up to 1.5% of
aggregate gross offering proceeds.
|
|
$14,027,000
|
|
|
$22,500,000
|
|
|
$5,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
and Operations Stage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Fees —
American Realty Capital Advisors, LLC(5)(6)
|
|
We
will pay to American Realty Capital Advisors, LLC 1% of the contract
purchase price of each property or asset.
|
|
$4,982,000
|
|
|
$13,275,000
|
|
|
$3,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Expenses
— American Realty Capital Advisors, LLC(7)
|
|
We
will reimburse our advisor for acquisition expenses (including, personnel
costs) incurred in the process of acquiring property. We expect
these expenses to be approximately 0.5% of the purchase price of each
property(8).
In no event will the total of all fees and acquisition expenses payable
with respect to a particular property or investment exceed 4% of the
contract purchase price.
|
|
$2,626,000
|
|
|
$6,000,000
|
|
|
$1,750,000
|
|
|
|
for Initial Offering and Follow-On Offering
|
|
|
|
|
|
|
Asset Management Fee
— American Realty Capital Advisors, LLC(9)
|
|
We
will pay to American Realty Capital Advisors, LLC a yearly fee equal to 1%
of the contract purchase price of all the properties payable semiannually
based on assets held by us on the measurement date, adjusted for
appropriate closing dates for individual property
acquisitions.
|
|
$495,000
|
|
Actual
amounts are dependent upon the aggregate asset value of our properties
and, therefore, cannot be determined at the present time. Because
the fee is based on a fixed percentage of aggregate asset value there is
no limit on the aggregate amount of these fees.
|
|
Actual
amounts are dependent upon the aggregate asset value of our properties
and, therefore, cannot be determined at the present time. Because
the fee is based on a fixed percentage of aggregate asset value there is
no limit on the aggregate amount of these fees.
|
|
|
|
|
|
|
|
|
|
|
Property Management
Fees — American Realty Capital Properties, LLC(10)(16)
|
|
We
will pay to American Realty Capital Properties, LLC (a) 2% of the gross
revenues from our single tenant properties and (b) 4% of the gross
revenues from our multi-tenant properties, plus reimbursement of American
Realty Capital Properties, LLC costs of managing the properties. In
the event that American Realty Capital Properties, LLC assists a tenant
with tenant improvements, a separate fee may be charged to, and payable
by, us. This fee will not exceed 5% of the cost of the tenant
improvements.
|
|
|
|
Actual
amounts are dependent upon the gross revenues from properties and,
therefore, cannot be determined at the present time. Because the fee
is based on a fixed percentage of the gross revenue and/or market rates,
there is no limit on the aggregate amount of these
fees.
|
|
Actual
amounts are dependent upon the gross revenues from properties and,
therefore, cannot be determined at the present time. Because the fee
is based on a fixed percentage of the gross revenue and/or market rates,
there is no limit on the aggregate amount of these
fees.
|
|
|
|
|
|
|
|
|
|
|
Leasing Commissions —
American Realty Capital Properties, LLC(11)(16)
|
|
We
will pay to American Realty Capital Properties, LLC prevailing market
rates. American Realty Capital Properties, LLC may also receive a
fee for the initial leasing of newly constructed properties, which
generally would equal one month’s rent.
|
|
|
|
Actual
amounts are dependent upon prevailing market rates in the geographic
regions in which we acquire property and, therefore, cannot be determined
at the present time. There is no limit on the aggregate amount of
these commissions.
|
|
Actual
amounts are dependent upon prevailing market rates in the geographic
regions in which we acquire property and, therefore, cannot be determined
at the present time. There is no limit on the aggregate amount of
these commissions.
|
|
|
|
|
|
|
|
|
|
|
Financing
Coordination Fee — American Realty Capital Advisors, LLC(7)
|
|
For
services in connection with the origination or refinancing of any debt
financing we obtain and use to acquire properties or to make other
permitted investments, or that is assumed, directly or indirectly, in
connection with the acquisition of properties, we will pay our advisor a
financing coordination fee equal to 1% of the amount available and/or
outstanding under such financing; provided, however, that our advisor will
not be entitled to a financing coordination fee in connection with the
refinancing of any loan secured by any particular property that was
previously subject to a refinancing in which our advisor received such a
fee. Financing coordination fees payable from loan proceeds from
permanent financing will be paid to our advisor as we acquire and/or
assume such permanent financing. However, no acquisition fees will
be paid on the investments of loan proceeds from any line of credit until
such time as we have invested all net offering
proceeds.
|
|
$2,778,000
|
|
Actual
amounts are dependent on the amount of any debt financing or refinancing
and, therefore, cannot be determined at the present time. Because
the fee is based on a fixed percentage of any debt financing, there is no
limit on the aggregate amount of these fees.
|
|
Actual
amounts are dependent on the amount of any debt financing or refinancing
and, therefore, cannot be determined at the present time. Because
the fee is based on a fixed percentage of any debt financing, there is no
limit on the aggregate amount of these
fees.
|
|
|
for Initial Offering and Follow-On Offering
|
|
|
|
|
|
|
Operating Expenses —
American Realty Capital Advisors, LLC(11)
|
|
We
will reimburse the expenses incurred by American Realty Capital Advisors,
LLC in connection with its provision of administrative services, including
related personnel costs, subject to the limitation that we will not
reimburse our advisor for any amount by which the operating expenses
(including the asset management fee) at the end of the four preceding
fiscal quarters exceeds the greater of (a) 2% of average invested assets,
or (b) 25% of net income other than any additions to reserves for
depreciation, bad debt or other similar noncash reserves and excluding any
gain from the sale of assets for that period.
|
|
|
|
Actual
amounts are dependent upon the expenses incurred and, therefore, cannot be
determined at the present time.
|
|
Actual
amounts are dependent upon the expenses incurred and, therefore, cannot be
determined at the present time.
|
|
|
|
|
|
|
|
|
|
Liquidation/Listing
Stage
|
|
|
|
|
|
|
|
|
|
Real Estate
Commissions — American Realty Capital Advisors, LLC or its Affiliates(12)
|
|
For
substantial assistance in connection with the sale of properties, we will
pay our advisor or its affiliates a brokerage commission paid on the sale
of property, not to exceed the lesser of one-half of reasonable customary
and competitive real estate commission or 3% of the contract price of each
property sold (inclusive of commissions paid to third party brokers);
provided, however, in no event may the real estate commissions paid to our
advisor, its affiliates and unaffiliated third parties exceed 6% of the
contract sales price.
|
|
|
|
Actual
amounts are dependent upon the contract price of properties sold and,
therefore, cannot be determined at the present time. Because the
commission is based on a fixed percentage of the contract price for a sold
property, there is no limit on the aggregate amount of these
commissions.
|
|
Actual
amounts are dependent upon the contract price of properties sold and,
therefore, cannot be determined at the present time. Because the
commission is based on a fixed percentage of the contract price for a sold
property, there is no limit on the aggregate amount of these
commissions.
|
|
|
for Initial Offering and Follow-On Offering
|
|
|
|
|
|
|
Subordinated
Participation in Net Sale Proceeds — American Realty Capital II, LLC(13)(14)(15)
|
|
After
investors have received a return of their capital contributions invested
and a 6% annual cumulative, non- compounded return, then American Realty
Capital II, LLC is entitled to receive 15% of remaining net sale
proceeds. We cannot assure you that we will provide this 6% return,
which we have disclosed solely as a measure for our advisor’s and its
affiliates incentive compensation. American Realty Capital II, LLC
will not be entitled to the Subordinated Participation in Net Sale
Proceeds unless our investors have received a 6% cumulative non-compounded
return on their capital contributions.
|
|
|
|
Actual
amounts are dependent upon results of operations and, therefore, cannot be
determined at the present time. There is no limit on the aggregate
amount of these payments.
|
|
Actual
amounts are dependent upon results of operations and, therefore, cannot be
determined at the present time. There is no limit on the aggregate
amount of these payments.
|
|
|
|
|
|
|
|
|
|
Subordinated
Incentive Listing Fee — American Realty Capital II, LLC(13)(14)
(15)
|
|
Upon
listing our common stock on the New York Stock Exchange or NASDAQ Stock
Market, our advisor is entitled to a fee equal to 15% of the amount, if
any, by which (a) the market value of our outstanding stock plus
distributions paid by us prior to listing, exceeds (b) the sum of the
total amount of capital raised from investors and the amount of cash flow
necessary to generate an 6% annual cumulative, non-compounded return to
investors. We have no intent to list our shares at this time.
We cannot assure you that we will provide this 6% return, which we have
disclosed solely as a measure for our advisor’s and its affiliates
incentive compensation. American Realty Capital II, LLC will not be
entitled to the Subordinated Incentive List Fee unless our investors have
received a 6% cumulative non-compounded return on their capital
contributions.
|
|
|
|
Actual
amounts are dependent upon total equity and debt capital we raise and
results of operations and, therefore, cannot be determined at the present
time. There is no limit on the aggregate amount of this
fee.
|
|
Actual
amounts are dependent upon total equity and debt capital we raise and
results of operations and, therefore, cannot be determined at the present
time. There is no limit on the aggregate amount of this
fee.
|
(1)
|
We
will pay all fees, commissions and expenses in cash, other than the
subordinated participation in net sales proceeds and incentive listing
fees with respect to which we may pay to American Realty Capital Advisors,
LLC in cash, common stock, a promissory note or any combination of the
foregoing, as we may determine in our
discretion.
|
(2)
|
The
estimated maximum dollar amounts are based on the sale of a maximum of
150,000,000 shares to the public at $10.00 per share and the sale of
25,000,000 shares at $9.50 per share pursuant to our distribution
reinvestment plan under the initial
offering.
|
(3)
|
Selling
commissions and, in some cases, the dealer manager fee, will not be
charged with regard to shares sold to or for the account of certain
categories of purchasers. See “Plan of
Distribution.”
|
(4)
|
These
organization and offering expenses include all expenses (other than
selling commissions and the dealer manager fee) to be paid by us in
connection with the offering, including our legal, accounting, printing,
mailing and filing fees, charges of our escrow holder, due diligence
expense reimbursements to participating broker-dealers and amounts to
reimburse American Realty Capital Advisors, LLC for its portion of the
salaries of the employees of its affiliates who provide services to our
advisor and other costs in connection with administrative oversight of the
offering and marketing process and preparing supplemental sales materials,
holding educational conferences and attending retail seminars conducted by
broker-dealers. Our advisor will be responsible for the payment of
all such organization and offering expenses to the extent such expenses
exceed 1.5% of the aggregate gross proceeds of this
offering.
|
(5)
|
This
estimate assumes the amount of proceeds available for investment is equal
to the gross offering proceeds less the public offering expenses, and we
have assumed that no financing is used to acquire properties or other real
estate assets. Our board’s investment policies limit our ability to
purchase property if the total of all acquisition fees and expenses
relating to the purchase exceeds 4% of the contract purchase price unless
a majority of our directors (including a majority of our independent
directors) not otherwise interested in the transaction approve fees and
expenses in excess of this limit and determine the transaction to be
commercially competitive, fair and reasonable to
us.
|
(6)
|
Included
in the computation of such fees will be any real estate commission,
acquisition and advisory fee, development fee, construction fee,
non-recurring management fee, loan fees, financing coordination fees or
points or any fee of a similar nature, which in the aggregate will not
exceed 6% of the sale price of such property or
properties.
|
(7)
|
Actual
gross amounts determined on a leveraged basis are dependent upon the
aggregate purchase price of our properties and, therefore, cannot be
determined at the present time.
|
(8)
|
Based
on the Sponsors’ experience with the acquisitions completed by American
Financial Realty Trust and our acquisitions completed to date, acquisition
expenses are generally 0.5% of the purchase price of each
property.
|
(9)
|
Aggregate
asset value will be equal to the aggregate value of our assets (other than
investments in bank accounts, money markets funds or other current assets)
at cost before deducting depreciation, bad debts or other similar non-cash
reserves and without reduction for any debt relating to such assets at the
date of measurement, except that during such periods in which our board of
directors is determining on a regular basis the current value of our net
assets for purposes of enabling fiduciaries of employee benefit plans
stockholders to comply with applicable Department of Labor reporting
requirements, aggregate asset value is the greater of (a) the amount
determined pursuant to the foregoing or (b) our assets’ aggregate
valuation most recently established by our board without reduction for
depreciation, bad debts or other similar non-cash reserves and without
reduction for any debt secured by or relating to such
assets.
|
(10)
|
The
property management and leasing fees payable to American Realty Capital
Properties, LLC are subject to the limitation that the aggregate of all
property management and leasing fees paid to American Realty Capital
Properties, LLC and its affiliates plus all payments to third parties for
property management and leasing services may not exceed the amount that
other non-affiliated property management and leasing companies generally
charge for similar services in the same geographic location.
Additionally, all property management and leasing fees, including both
those paid to American Realty Capital Properties, LLC and third parties,
are subject to the limit on total operating expenses as described on the
following two pages. American Realty Capital Properties, LLC may
subcontract its duties for a fee that may be less than the fee provided
for in our property management agreement with American Realty Capital
Properties, LLC.
|
(11)
|
We
may reimburse our advisor in excess of that limit in the event that a
majority of our independent directors determine, based on unusual and
non-recurring factors, that a higher level of expense is justified.
In such an event, we will send notice to each of our stockholders within
60 days after the end of the fiscal quarter for which such determination
was made, along with an explanation of the factors our independent
directors considered in making such determination. We will not
reimburse our advisor for personnel costs in connection with services for
which the advisor receives acquisition fees or real estate
commissions.
|
We lease
a portion of our office space from an affiliate of our advisor and share the
space with other American Realty Capital-related entities. The amount we
will pay under the lease will be determined on a monthly basis based upon on the
allocation of the overall lease cost to the approximate percentage of time, size
of the area that we utilize and other resources allocated to us.
(12)
|
Although
we are most likely to pay real estate commissions to American Realty
Capital Advisors, LLC or an affiliate in the event of our liquidation,
these fees may also be earned during our operational
stage.
|
(13)
|
Upon
termination of the Advisory Agreement, American Realty Capital II, LLC may
be entitled to a similar performance fee if American Realty Capital II,
LLC would have been entitled to a subordinated participation in net sale
proceeds had the portfolio been liquidated (based on an independent
appraised value of the portfolio) on the date of termination. Under
our charter, we could not increase these success-based fees without the
approval of a majority of our independent directors, and any increase in
the subordinated participation in net sale proceeds would have to be
reasonable. Our charter provides that such incentive fee is
“presumptively reasonable” if it does not exceed 15% of the balance of
such net proceeds remaining after investors have received a return of
their net capital contributions and an 6% per year cumulative,
non-compounded return.
|
American
Realty Capital II, LLC cannot earn both the subordinated participation in net
sale proceeds and the subordinated incentive listing fee. As agreed with
the Ohio Division of Securities in connection with the qualification of the
offering in that state, the advisor and the Company have agreed that any
subordinated listing fee or termination payments due to the advisor will only be
paid when assets acquired during the period that the advisor was entitled to
such payments are sold or refinanced. The payment of such subordinated
listing fee or termination fee will be paid by the issuance of a non-interest
bearing, non-transferable promissory note in the amount of such fee. The note
will be payable as the subject assets are sold or refinanced. In the event
that the note is not paid in full in three years after issuance and the Company
is listed, the note is convertible at the option of the advisor into shares of
the Company’s common stock. If shares are used for payment, we do not
anticipate that they will be registered under the Securities Act and, therefore,
will be subject to restrictions on transferability. Any portion of the
subordinated participation in net sale proceeds that American Realty Capital II,
LLC receives prior to our listing will offset the amount otherwise due pursuant
to the subordinated incentive listing fee. In no event will the amount
paid to American Realty Capital II, LLC under the promissory note, if any,
exceed the amount considered presumptively reasonable by the NASAA REIT
Guidelines.
(14)
|
If
at any time the shares become listed on the New York Stock Exchange or
NASDAQ Stock Market, we will negotiate in good faith with American Realty
Capital II, LLC a fee structure appropriate for an entity with a perpetual
life. Our independent directors must approve the new fee structure
negotiated with American Realty Capital II, LLC. The market value of
our outstanding stock will be calculated based on the average market value
of the shares issued and outstanding at listing over the 30 trading days
beginning 180 days after the shares are first listed or included for
quotation. As agreed with the Ohio Division of Securities in
connection with the qualification of the offering in that state, the
advisor and the Company have agreed that any subordinated listing fee or
termination payments due to the advisor will only be paid when assets
acquired during the period that the advisor was entitled to such payments
are sold or refinanced. The payment of such subordinated listing fee
or termination fee will be paid by the issuance of a non-interest bearing,
non-transferable promissory note in the amount of such fee. The note will
be payable as the subject assets are sold or refinanced. In the
event that the note is not paid in full in three years after issuance and
the Company is listed, the note is convertible at the option of the
advisor into shares of the Company’s common stock. In the event the
subordinated incentive listing fee is earned by American Realty Capital
II, LLC as a result of the listing of the shares, any previous payments of
the subordinated participation in net sale proceeds will offset the
amounts due pursuant to the subordinated incentive listing fee, and we
will not be required to pay American Realty Capital Advisors, LLC any
further subordinated participation in net sale
proceeds.
|
(15)
|
Our
charter and the Partnership Agreement of American Realty Capital Operating
Partnership, L.P. provide that before any subordinated participation
in net sales proceeds or subordinated incentive listing fee is paid to
American Realty Capital II, LLC, the shareholders of our stock have to
receive a 6% cumulative non-compounded return on their original purchase
price for their shares. American Realty Capital II, LLC will not be
entitled to the Subordinated Participation in Net Sale Proceeds unless our
investors have received a 6% cumulative non-compounded return on their
capital contributions. American Realty Capital II, LLC will not be
entitled to the Subordinated Incentive List Fee unless our investors have
received a 6% cumulative non-compounded return on their capital
contributions.
|
(16)
|
All
fees and commissions under the Property Management Agreement will be no
less favorable than fees and commissions from transactions with
unaffiliated third parties performing property management for double and
triple net leases.
|
At least
a majority of our independent directors must determine, from time to time but at
least annually, that our total fees and expenses are reasonable in light of our
investment performance, net assets, net income and the fees and expenses of
other comparable unaffiliated REITs. Each such determination will be
reflected in the minutes of our board of directors. The total operating
expenses (as defined in the NASAA REIT Guidelines) of the company will not
exceed, in any fiscal year, the greater of 2% of the Average Invested Assets (as
defined in the NASAA REIT Guidelines) or 25% of Net Income (as defined in the
NASAA REIT Guidelines), unless our independent directors find that, based on
unusual and non-recurring factors, a higher level of expense is justified for
that year. Our independent directors shall also supervise the performance
of our advisor and the compensation that we pay to it to determine that the
provisions of our advisory agreement are being carried out.
Each such
determination will be recorded in the minutes of our board of directors and
based on the factors set forth below and other factors that the independent
directors deem relevant:
|
·
|
the
size of the advisory fee in relation to the size, composition and
profitability of our portfolio;
|
|
·
|
the
success of American Realty Capital Advisors, LLC in generating
opportunities that meet our investment
objectives;
|
|
·
|
the
rates charged to other REITs, especially similarly structured REITs, and
to investors other than REITs by advisors performing similar
services;
|
|
·
|
additional
revenues realized by American Realty Capital Advisors, LLC through its
relationship with us;
|
|
·
|
the
quality and extent of service and advice furnished by American Realty
Capital Advisors, LLC;
|
|
·
|
the
performance of our investment portfolio, including income, conservation or
appreciation of capital, frequency of problem investments and competence
in dealing with distress situations;
and
|
|
·
|
the
quality of our portfolio in relationship to the investments generated by
American Realty Capital Advisors, LLC for the account of other
clients.
|
Since
American Realty Capital Advisors, LLC and its affiliates are entitled to
differing levels of compensation for undertaking different transactions on our
behalf, such as the property management fees for operating our properties and
the subordinated participation in net sale proceeds, our advisor has the ability
to affect the nature of the compensation it receives by undertaking different
transactions. However, American Realty Capital Advisors, LLC is obligated
to exercise good faith and integrity in all its dealings with respect to our
affairs pursuant to the advisory agreement. See “Management — The Advisory
Agreement.”
STOCK
OWNERSHIP
The
following table shows, as of the date of July 27, 2010, the amount of our common
stock beneficially owned by (a) any person who is known by us to be the
beneficial owner of more than 5% of our outstanding shares, (b) members of our
board of directors and proposed directors, (c) our executive officers, and (d)
all of our directors and executive officers as a group.
|
|
Common Stock
Beneficially Owned(2)
|
|
Name of Beneficial Owner(1)
|
|
Number of
Shares of
Common Stock
|
|
|
|
|
Nicholas
S. Schorsch, Chairman of the Board of Directors, Chief Executive
Officer(3)
|
|
|
56,621 |
|
|
|
* |
% |
William
M. Kahane, President, Chief Operating Officer, Director and Treasurer(3)
|
|
|
56,621 |
|
|
|
* |
% |
Peter
M. Budko, Executive Vice President and Chief Investment
Officer
|
|
|
2,880 |
|
|
|
* |
% |
Edward
M. Weil, Jr., Executive Vice President and Secretary
|
|
|
1,260 |
|
|
|
* |
% |
Brian
S. Block, Executive Vice President and Chief Financial
Officer
|
|
|
780 |
|
|
|
* |
% |
Leslie
D. Michelson, Independent Director(4)
|
|
|
10,146 |
|
|
|
* |
% |
William
G. Stanley, Independent Director(5)
|
|
|
58,205 |
|
|
|
* |
% |
Robert
H. Burns, Independent Director(6)
|
|
|
54,077 |
|
|
|
* |
% |
All
directors and executive officers as a group (seven
persons)
|
|
|
240,590 |
|
|
|
* |
|
(1)
|
Address
of each beneficial owner listed is:
|
Nicholas
S. Schorsch
c/o
American Realty Capital
106
Old York Road
Jenkintown,
PA 19046
|
William
M. Kahane
c/o
American Realty Capital
405
Park Avenue
New
York, NY 10022
|
|
|
Peter
M. Budko
c/o
American Realty Capital
405
Park Avenue
New
York, NY 10022
|
Edward
M. Weil, Jr.
c/o
American Realty Capital
106
Old York Road
Jenkintown,
PA 19046
|
|
|
Brian
S. Block
c/o
American Realty Capital
106
Old York Road
Jenkintown,
PA 19046
|
Leslie
D. Michelson
c/o
American Realty Capital
405
Park Avenue
New
York, NY 10022
|
|
|
William
G. Stanley
c/o
American Realty Capital
405
Park Avenue
New
York, NY 10022
|
Robert
H. Burns
c/o
American Realty Capital
405
Park Avenue
New
York, NY 10022
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(2)
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Based
on 33,045,410 shares of common stock outstanding as of July 27,
2010. Shares of common stock subject to stock options that are
currently exercisable or exercisable within sixty days of July 27, 2010 as
well as shares of restricted stock which vest within sixty days of July
27, 2010, are deemed outstanding in addition to the 33,045,410 shares of
common stock outstanding as of July 27, 2010 for computing the percentage
ownership of the person holding the stock options or shares that will
vest, but are not deemed outstanding for computing the percentage
ownership of any other person. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission that
deem shares to be beneficially owned by any person or group who has or
shares voting and investment power with respect to such
shares.
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(3)
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The
shares owned in the aggregate by Messrs. Schorsch, Kahane, Budko, Block
and Weil include 20,000 shares owned by American Realty Capital II,
LLC.
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(4)
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Shares
owned by Mr. Michelson include options to purchase 3,000 shares of common
stock, 6,550 shares issued for Board related services in lieu of cash
consideration and 596 shares issued under the
DRIP.
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(5)
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Shares
owned by Mr. Stanley include options to purchase 3,000 shares of common
stock, 6,633 shares issued for Board related services in lieu of cash
consideration, 4,128 shares issued under the DRIP and 44,444 shares
purchased by Mr. Stanley.
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(6)
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Shares
owned by Mr. Burns include options to purchase 3,000 shares of common
stock, 6,633 shares issued for Board related services in lieu of cash
consideration, 8,320 shares issued under the DRIP and 44,444 shares
purchased by Mr. Burns.
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CONFLICTS
OF INTEREST
We are
subject to various conflicts of interest arising out of our relationship with
American Realty Capital Advisors, LLC, our advisor, and its affiliates,
including conflicts related to the arrangements pursuant to which American
Realty Capital Advisors, LLC and its affiliates will be compensated by us.
Our agreements and compensation arrangements with our advisor and its affiliates
were not determined by arm’s-length negotiations. See the “Management
Compensation” section of this prospectus. Some of the conflicts of
interest in our transactions with our advisor and its affiliates, and the
limitations on our advisor adopted to address these conflicts, are described
below.
Although
there are currently no other American Realty Capital-sponsored programs and none
are currently anticipated, our advisor and its affiliates will try to balance
our interests with their duties to any other future American Realty
Capital-sponsored programs. However, to the extent that our advisor or its
affiliates take actions that are more favorable to other entities than to us,
these actions could have a negative impact on our financial performance and,
consequently, on distributions to you and the value of our stock. In
addition, our directors, officers and certain of our stockholders may engage for
their own account in business activities of the types conducted or to be
conducted by our subsidiaries and us. For a description of some of the
risks related to these conflicts of interest, see the section of this prospectus
captioned “Risk Factors — Risks Related to Conflicts of Interest.”
Our
independent directors have an obligation to function on our behalf in all
situations in which a conflict of interest may arise, and all of our directors
have a fiduciary obligation to act on behalf of our stockholders.
Interests
in Other Real Estate Programs
Affiliates
of our officers and entities owned or managed by such affiliates may acquire or
develop real estate for their own accounts, and have done so in the past.
Furthermore, affiliates of our officers and entities owned or managed by such
affiliates intend to form additional real estate investment entities in the
future, whether public or private, which can be expected to have the same
investment objectives and policies as we do and which may be involved in the
same geographic area, and such persons may be engaged in sponsoring one or more
of such entities at approximately the same time as our shares of common stock
are being offered. Our advisor, its affiliates and affiliates of our
officers are not obligated to present to us any particular investment
opportunity that comes to their attention, even if such opportunity is of a
character that might be suitable for investment by us. Our advisor and its
affiliates likely will experience conflicts of interest as they simultaneously
perform services for us and other affiliated real estate programs.
Any
affiliated entity, whether or not currently existing, could compete with us in
the sale or operation of the properties. We will seek to achieve any
operating efficiency or similar savings that may result from affiliated
management of competitive properties. However, to the extent that
affiliates own or acquire property that is adjacent, or in close proximity, to a
property we own, our property may compete with the affiliate’s property for
tenants or purchasers.
Every
transaction that we enter into with our advisor or its affiliates is subject to
an inherent conflict of interest. Our board of directors may encounter
conflicts of interest in enforcing our rights against any affiliate in the event
of a default by or disagreement with an affiliate or in invoking powers, rights
or options pursuant to any agreement between us and our advisor or any of its
affiliates.
Other
Activities of American Realty Capital Advisors, LLC and Its
Affiliates
We will
rely on American Realty Capital Advisors, LLC for the day-to-day operation of
our business. As a result of the interests of members of its management in
other American Realty Capital-sponsored programs and the fact that they also are
engaged, and will continue to engage, in other business activities, American
Realty Capital Advisors, LLC and its affiliates have conflicts of interest in
allocating their time between us and other American Realty Capital-sponsored
programs and other activities in which they are involved. However,
American Realty Capital Advisors, LLC believes that it and its affiliates have
sufficient personnel to discharge fully their responsibilities to all of the
American Realty Capital-sponsored programs and other ventures in which they are
involved. All of our executive officers will spend at least a majority of
their time involved in our operations and Messrs. Budko, Block and Weil will
spend substantially all of their time involved in our operations.
In
addition, each of our executive officers also serves as an officer of our
advisor, our property manager, our dealer manager and/or other affiliated
entities. As a result, these individuals owe duties to these other
entities, which may conflict with the duties that they owe to us and our
stockholders.
On March
9, 2010, the Board of Directors of the Company approved the recommendation of
the officers of the Company that the Company continue not to pursue any
opportunities to acquire real property from an entity affiliated with its
advisor. The Board of Directors determined that this practice will remain
in effect during the remaining term of the initial offering and the follow-on
offering. If the Company’s Board of Directors decides to amend the
company’s current policy, we may purchase properties or interests in properties
from affiliates of American Realty Capital Advisors, LLC. The prices we
would pay to affiliates of our advisor for these properties would not be the
subject of arm’s-length negotiations, which could mean that the acquisitions may
be on terms less favorable to us than those negotiated with unaffiliated
parties. However, our charter provides that the purchase price of any
property acquired from an affiliate may not exceed its current appraised value,
which must be determined by a qualified independent appraiser selected by our
independent directors. In addition, a majority of our directors, including
our independent directors, who have no financial interest in the transaction
must determine that the transaction is fair and reasonable and that the
transaction is at a price to us no greater than the cost paid by our affiliate
or, if the price to us exceeds such cost, that there is substantial
justification for the excess cost.
Competition
in Acquiring, Leasing and Operating of Properties
Conflicts
of interest will exist to the extent that we may acquire, or seek to acquire,
properties in the same geographic areas where properties owned by other American
Realty Capital-sponsored programs are located. In such a case, a conflict
could arise in the acquisition or leasing of properties in the event that we and
another American Realty Capital-sponsored program were to compete for the same
properties or tenants in negotiating leases, or a conflict could arise in
connection with the resale of properties in the event that we and another
American Realty Capital-sponsored program were to attempt to sell similar
properties at the same time. Conflicts of interest may also exist at such
time as we or our affiliates managing property on our behalf seek to employ
developers, contractors or building managers, as well as under other
circumstances. American Realty Capital Advisors, LLC will seek to reduce
conflicts relating to the employment of developers, contractors or building
managers by making prospective employees aware of all such properties seeking to
employ such persons. In addition, American Realty Capital Advisors, LLC
will seek to reduce conflicts that may arise with respect to properties
available for sale or rent by making prospective purchasers or tenants aware of
all such properties. However, these conflicts cannot be fully avoided in
that there may be established differing compensation arrangements for employees
at different properties or differing terms for resales or leasing of the various
properties.
Affiliated
Dealer Manager
Since
Realty Capital Securities, LLC, our dealer manager, is an affiliate of American
Realty Capital Advisors, LLC, we will not have the benefit of an independent due
diligence review and investigation of the type normally performed by an
unaffiliated, independent underwriter in connection with the offering of
securities. See the “Plan of Distribution” section of this
prospectus.
Affiliated
Property Manager
We expect
that all of our properties will be managed and leased by our affiliated property
manager, American Realty Capital Properties, LLC, pursuant to a property
management and leasing agreement. Our agreement with American Realty
Capital Properties, LLC has a one-year term, which may be renewed for an
unlimited number of successive one-year terms upon the mutual consent of the
parties. Each such renewal shall be for a term of no more than one
year. It is the duty of our board of directors to evaluate the performance
of the property manager annually before renewing the agreement. We may
terminate the agreement in the event of negligence or misconduct on the part of
American Realty Capital Properties, LLC. We expect American Realty Capital
Properties, LLC to also serve as property manager for properties owned by
affiliated real estate programs, some of which may be in competition with our
properties. Management fees to be paid to our property manager are based
on a percentage of the rental income received by the managed properties.
For a more detailed discussion of the anticipated fees to be paid for property
management services, see the “Management Compensation” section of this
prospectus.
Lack
of Separate Representation
Proskauer
Rose LLP acts, and may in the future act, as counsel to us, American Realty
Capital Advisors, LLC, Realty Capital Securities, LLC and their affiliates in
connection with this offering or otherwise. There is a possibility that in
the future the interests of the various parties may become adverse, and under
the Code of Professional Responsibility of the legal profession, Proskauer Rose
LLP may be precluded from representing any one or all of such parties. In
the event that a dispute were to arise between us, American Realty Capital
Advisors, LLC, Realty Capital Securities, LLC or any of their affiliates,
separate counsel for such matters will be retained as and when
appropriate.
Joint
Ventures with Affiliates of American Realty Capital Advisors, LLC
We may
enter into joint ventures with other American Realty Capital-sponsored programs
(as well as other parties) for the acquisition, development or improvement of
properties. See “Investment Objectives and Policies —Acquisition and
Investment Policies — Joint Venture Investments.” American Realty Capital
Advisors, LLC and its affiliates may have conflicts of interest in determining
that American Realty Capital-sponsored program should enter into any particular
joint venture agreement. The co-venturer may have economic or business
interests or goals which are or which may become inconsistent with our business
interests or goals. In addition, should any such joint venture be
consummated, American Realty Capital Advisors, LLC may face a conflict in
structuring the terms of the relationship between our interests and the interest
of the co-venturer and in managing the joint venture. Since American
Realty Capital Advisors, LLC and its affiliates will control both us and any
affiliated co-venturer, agreements and transactions between the co-venturers
with respect to any such joint venture will not have the benefit of arm’s-length
negotiation of the type normally conducted between unrelated
co-venturers.
Receipt
of Fees and Other Compensation by American Realty Capital Advisors, LLC and Its
Affiliates
A
transaction involving the purchase and sale of properties may result in the
receipt of commissions, fees and other compensation by American Realty Capital
Advisors, LLC and its affiliates, including acquisition and advisory fees, the
dealer manager fee, property management and leasing fees, real estate brokerage
commissions and participation in non-liquidating net sale proceeds.
However, the fees and compensation payable to American Realty Capital Advisors,
LLC and its affiliates relating to the sale of properties will only payable
after the return to the stockholders of their capital contributions plus
cumulative returns on such capital. Subject to oversight by our board of
directors, American Realty Capital Advisors, LLC will have considerable
discretion with respect to all decisions relating to the terms and timing of all
transactions. Therefore, our advisor and our property manager may have
conflicts of interest concerning certain actions taken on our behalf,
particularly due to the fact that such fees will generally be payable to our
advisor, our property manager and their affiliates regardless of the quality or
performance of the properties acquired or the services provided to us. See
the “Management Compensation” section of this prospectus.
Certain
Conflict Resolution Procedures
Every
transaction that we enter into with American Realty Capital Advisors, LLC or its
affiliates will be subject to an inherent conflict of interest. Our board
of directors may encounter conflicts of interest in enforcing our rights against
any affiliate in the event of a default by or disagreement with an affiliate or
in invoking powers, rights or options pursuant to any agreement between us and
American Realty Capital Advisors, LLC or any of its affiliates.
In order
to reduce or eliminate certain potential conflicts of interest, our charter
contains a number of restrictions relating to (a) transactions we enter into
with our sponsor, our advisor, any director or their affiliates, (b) certain
future offerings, and (c) allocation of investment opportunities among
affiliated entities. These restrictions include, among others, the
following:
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On
March 9, 2010, the Board of Directors of the Company approved the
recommendation of the officers of the Company that the Company continue
not to pursue any opportunities to acquire real property from an entity
affiliated with its advisor. The Board of Directors determined that
this practice will remain in effect during the remaining term of the
initial offering and the follow-on
offering.
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·
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We
will not make any loans to our sponsor, our advisor, any of our directors
or any of their respective affiliates, except that we may make or invest
in mortgage, bridge or mezzanine loans involving our sponsor, our advisor,
our directors or their respective affiliates, provided that an appraisal
of the underlying property is obtained from an independent appraiser and a
majority of the directors, including a majority of the independent
directors, not otherwise interested in the transaction determine that the
transaction is fair and reasonable to us and on terms no less favorable to
us than those available from third parties. In addition, our
sponsor, our advisor any of our directors and any of their respective
affiliates will not make loans to us or to joint ventures in which we are
a joint venture partner unless approved by a majority of the directors,
including a majority of the independent directors not otherwise interested
in the transaction as fair, competitive and commercially reasonable, and
no less favorable to us than comparable loans between unaffiliated
parties. As approved by all of our independent directors pursuant to
our charter, the advisor may lend to American Realty Capital Operating
Partnership, LP up to ten million dollars ($10,000,000) from time to time
as needed to provide short-term financing relating to property
acquisitions. Such borrowed funds will be repaid within 180 days or
sooner, not subject to a pre-payment penalty, and will accrue interest at
a fair and competitive (commercially reasonable) rate of
interest.
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·
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Our
advisor and its affiliates will be entitled to reimbursement, at cost, for
actual expenses incurred by them on behalf of us or joint ventures in
which we are a joint venture partner; provided, however, that we will not
reimburse our advisor for the amount, if any, by which our total operating
expenses, including the advisor asset management fee, paid during the
previous fiscal year exceeded the greater of: (a) 2% of our average
invested assets for that fiscal year, or (b) 25% of our net income,
before any additions to reserves for depreciation, bad debts or other
similar non-cash reserves and before any gain from the sale of our assets,
for that fiscal year.
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·
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In
the event that an investment opportunity becomes available that is
suitable, under all of the factors considered by American Realty Capital
Advisors, LLC, for both us and one or more other entities affiliated with
American Realty Capital Advisors, LLC, and for which more than one of such
entities has sufficient uninvested funds, then the entity that has had the
longest period of time elapse since it was offered an investment
opportunity will first be offered such investment opportunity. It
will be the duty of our board of directors, including the independent
directors, to insure that this method is applied fairly to us. In
determining whether or not an investment opportunity is suitable for more
than one program, American Realty Capital Advisors, LLC, subject to
approval by our board of directors, shall examine, among others, the
following factors:
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the
anticipated cash flow of the property to be acquired and the cash
requirements of each program;
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the
effect of the acquisition both on diversification of each program’s
investments by type of property, geographic area and tenant
concentration;
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the
policy of each program relating to leverage of
properties;
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the
income tax effects of the purchase to each
program;
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the
size of the investment; and
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the
amount of funds available to each program and the length of time such
funds have been available for
investment.
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If
a subsequent development, such as a delay in the closing of a property or
a delay in the construction of a property, causes any such investment, in
the opinion of American Realty Capital Advisors, LLC, to be more
appropriate for a program other than the program that committed to make
the investment, American Realty Capital Advisors, LLC may determine that
another program affiliated with American Realty Capital Advisors, LLC or
its affiliates will make the investment. Our board of directors has
a duty to ensure that the method used by American Realty Capital Advisors,
LLC for the allocation of the acquisition of properties by two or more
affiliated programs seeking to acquire similar types of properties is
applied fairly to us.
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We
will not accept goods or services from our sponsor, our advisor, any
director or their affiliates or enter into any other transaction with our
sponsor, our advisor, any director or their affiliates unless a majority
of our directors, including a majority of the independent directors, not
otherwise interested in the transaction determines that such transaction
is fair and reasonable to us and on terms and conditions not less
favorable to us than those available from unaffiliated third
parties.
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Effective
March 31, 2009, the Board of Directors approved the recommendation of the
officers of the Company that the Company not pursue any opportunities to acquire
real property from an entity affiliated with its advisor, American Realty
Capital Advisors, LLC. The foregoing recommendation shall be reviewed
annually by the Board of Directors. On March 9, 2010, the Board of
Directors of the Company approved the recommendation of the officers of the
Company that the Company continue not to pursue any opportunities to acquire
real property from an entity affiliated with its advisor. The Board of
Directors determined that this practice will remain in effect during the
remaining term of the initial offering and the follow-on offering.
The
following chart shows the ownership structure of the various American Realty
Capital entities that are affiliated with American Realty Capital Advisors,
LLC.
(1)
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The
investors will own registered shares of common stock in American Realty
Capital Trust, Inc.
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(2)
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The
Individuals are our Sponsors, Nicholas S. Schorsch, William M. Kahane,
Peter M. Budko, Brian S. Block, and Edward M. Weil, Jr., whose ownership
in the affiliates is represented by direct and indirect
interests.
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(3)
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American
Realty Capital II, LLC currently owns 20,000 shares of our common
stock.
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(4)
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American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into a Dealer Manager Agreement with Realty
Capital Securities, LLC, which serves as our dealer
manager.
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(5)
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American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into an Advisory Agreement with American
Realty Capital Advisors, LLC, which serves as our
advisor.
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(6)
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American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into a Property Management Agreement with
American Realty Capital Properties, LLC, which serves as our property
manager.
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(7)
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American
Realty Capital Operating Partnership, L.P. owns the properties indirectly
through respective special purpose
entities.
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INVESTMENT
OBJECTIVES AND POLICIES
General
We invest
in commercial real estate properties. Our primary investment objectives
are:
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to
provide current income for you through the payment of cash distributions;
and
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to
preserve and return your capital
contributions.
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We also
seek capital gain from our investments. You may be able to obtain a return
on all or a portion of your capital contribution in connection with the sale of
your shares if we list our shares on an exchange. We cannot assure you
that we will attain any of these objectives. See “Risk
Factors.”
Our core
investment strategy for achieving these objectives is to acquire, own and manage
a portfolio of free standing commercial properties that are leased to a
diversified group of credit worthy companies on a single tenant, net lease
basis. Net leases generally require the tenant to pay substantially all of
the costs associated with operating and maintaining the property such as
maintenance, insurance, taxes, structural repairs and all other operating and
capital expenses (referred to as “triple-net leases”).
We will
seek to list our shares of common stock for trading on a national securities
exchange only if a majority of our directors believe listing would be in our
best interests. We do not intend to list our shares at this time. We
do not anticipate that there will be any market for our common stock until our
shares are listed or quoted. In making the decision to apply for listing
of our shares or provide other forms of liquidity, such as selling our
properties and other assets either on a portfolio basis or individually or
engaging in a business combination transaction, our board of directors will
evaluate whether listing the shares, liquidating or another transaction would be
in our best interests. It cannot be determined at this time the
circumstances, if any, under which the board of directors would determine to
list the shares. If we do not list our shares of common stock on the New
York Stock Exchange or NASDAQ Stock Market by December 1, 2018, we intend to
either:
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seek
stockholder approval of an extension or amendment of this listing
deadline; or
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seek
stockholder approval to adopt a plan of liquidation of the
corporation.
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If we
sought and did not obtain stockholder approval of an extension or amendment to
the listing deadline, we intend then to adopt a plan of liquidation and begin an
orderly sale of our properties.
Our board
of directors may revise our investment policies, which we describe in more
detail below, without the concurrence of our stockholders. Our independent
directors will review our investment policies, which we discuss in detail below,
at least annually to determine that our policies are in the best interest of our
stockholders.
American
Realty Capital’s Business Plan
In 2006,
Nicholas S. Schorsch and William M. Kahane (“Sponsors”) resigned their positions
with American Financial Realty Trust (NYSE: AFR), the company they had been
instrumental in building into the nation’s largest owner of real estate leased
to financial institutions, to form American Realty Capital (“ARC”), which
acquires net leased properties. ARC’s first acquisition was completed in
December 2006. Since then through September 30, 2009, ARC has acquired 104
properties totaling approximately 1.0 million rentable square feet with a total
acquisition cost of $231.8 million. Its pipeline includes properties under
contract at a cost of approximately $86.6 million, with closings scheduled to
occur through November 2009. See also “Prior Performance Summary.” Through
their real estate knowledge, and understanding of the capital markets, our
Sponsors have built a real estate platform that will allow them to continue to
expand their real estate net lease business, including the investing of the
proceeds of this offering.
ARC
primarily acquires freestanding, single-tenant properties net leased to
investment grade and other creditworthy tenants throughout the United States and
Puerto Rico. All of its acquisitions must meet the following investment
criteria, they:
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provide
stable and predictable income, with maximum current
yield;
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are
diversified across industry segments, geographies, and credits, assuring
the security diversification
affords;
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offer
returns comparable to equity with the security of fixed-income assets;
and
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potentially
appreciate because of the value of the underlying real
estate.
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ARC’s
expertise in real estate and finance will enable the REIT to acquire a
diversified portfolio of properties providing a competitive risk-adjusted
return. Through ARC’s ability to purchase and finance a large number of
properties, ARC is able to minimize risk, to create diversification, to protect
yield and to achieve its investment objectives. ARC’s principals have a
track-record of acquiring many properties and a network of relationships within
most major real estate financial institutions. These relationships with
financial institutions, including lenders, assure our investors that we have
access to debt capital and the ability to negotiate favorable debt terms on a
property by property basis. Our ability to achieve favorable debt terms
allows us to lever our investors’ equity prudently and meet our established
investment objectives. ARC approaches real estate as follows:
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takes
an institutional, categorical approach based on asset class, geography,
and tenancy;
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underwrites
each property individually, while employing an overall methodology that
rests on the premise that by assembling a portfolio that is diverse in
terms of geography, asset class and tenant credit, will create a diverse
portfolio that is negatively correlated to the public real estate equity
markets, which in turn results in a portfolio comprised of a collection of
properties whose sum is potentially more valuable than its individual
components because individual property market risk is reduced, thus
improving risk-adjusted returns;
and
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utilizes
our rigorous site evaluation and due diligence processes to assure that it
can meet its investment objectives.
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ARC’s
team is made up of persons with extensive legal, accounting, finance, operations
and underwriting experience. ARC is able to approach sale-leaseback
opportunities and offer, structure and implement leases that provide a business
solution to the tenant’s financial, accounting, legal and strategic
objectives. ARC attempts to create value for its tenants through specific
business-oriented lease structures not offered by other real estate
buyers. Its experience in structuring operating leases, as well as
incorporating specific tenant requests, gives tenants the opportunity to create
flexibility not typically found in traditional sale-leaseback
transactions. This in turn has made ARC, the landlord of choice for
several tenants and provides ARC with opportunities not readily available in the
market place.
Through
its understanding of the debt markets and relationships with the commercial
mortgage backed securities (“CMBS”) providers and the general lending industry,
ARC is able match each investment opportunity with the appropriate borrowing
source.
The
diligence team is made up of real estate professionals, many with legal
backgrounds. The rigorous due diligence processes coupled with
institutional procedures helps ARC buy only appropriate real
estate.
Acquisition
and Investment Policies
Types
of Investments
We employ
a focused investment strategy: acquire single-tenant, freestanding
properties, net-leased on a long-term basis to investment-grade and other
creditworthy tenants. From a geographical standpoint, our target
properties: (i) enjoy a strong location on “Main Street, USA,” e.g.,
pharmacies, banks, restaurants, gas/convenience stores; or (ii) are situated
along high traffic transit corridors at locations carefully selected by the
corporate tenant to support operationally essential corporate
distribution/warehouse and logistical facilities.
We
believe that American corporations, seeking to reduce the costs of distributing
their goods and services, are re-evaluating supply chain management and
distribution/warehouse capabilities. We believe that this has led to an
increased need for well-located real estate from which corporations may cost
efficiently aggregate from suppliers and deploy to their regional retail
stores. We consider these two operationally essential categories as
complementary to our overall portfolio.
American
Realty Capital Trust shall seek to build a diversified portfolio comprised
primarily of free-standing single-tenant bank branch, convenience store, retail,
office and industrial properties that are double-net and triple-net leased to
investment grade (S&P BBB- or better) and other creditworthy tenants.
Triple-net (NNN) leases typically require the tenant to pay substantially all of
the costs associated with operating and maintaining the property such as
maintenance, insurance, taxes, structural repairs and all other operating and
capital expenses. Double-net (NN) leases typically provide that the
landlord is responsible for maintaining the roof and structure, or other
structural aspects of the property, while the tenant is responsible for all
remaining expenses associated with the property. As of July 27, 2010,
84.8% of the total square footage of our portfolio was leased to tenants in
triple-net lease arrangements while the remaining 15.2% was leased with
double-net lease arrangements. We will seek to build a portfolio where at least
50% of the portfolio will be comprised of properties leased to investment grade
tenants. While most of our investment will be directly in such properties,
we may also invest in entities that own or invest in such properties. We
shall strive to assemble a portfolio of real estate that is diversified by
industry, geography, tenants, credits, and use. We do not anticipate any
single tenant or geographic concentration to comprise more than 10% of our
portfolio. We anticipate that our portfolio will consist primarily of
freestanding, single-tenant properties net leased for use as bank branches,
convenience stores, retail, office and industrial establishments. Although
we expect our portfolio will consist primarily of freestanding, single-tenant
properties, we will not forgo opportunities to invest in other types of real
estate investments that meet our overall investment objectives.
Additionally,
we expect to further diversify our portfolio by making first mortgage, bridge or
mezzanine loans on single-tenant net-leased properties. We will acquire or
invest in properties and loans located only in the United States and the
Commonwealth of Puerto Rico. See “— Making Loans and Investments in
Mortgages.”
We expect
that our properties will be leased to investment grade or creditworthy
prominent, nationwide or local banking, convenience store, retail, office and
industrial tenants. Our advisor will primarily target bank branch,
convenience store, retail, office and industrial tenants with established track
records.
Our
advisor believes that a REIT focusing on the acquisition of single-tenant
freestanding, bank branch, convenience store, retail, office and industrial
properties double-net and triple-net leased to investment-grade and other
creditworthy tenants for periods of 10 to 25 years or greater presents an
optimal risk-adjusted return and will help us achieve our investment objectives;
(a) to provide current income for you through the payment of cash distributions
and (b) to preserve and return your capital and to maximize risk-adjusted
returns. Unlike funds that invest solely in multitenant properties, or in
properties that are predominantly occupied by non-investment grade tenants and
subject to short-term leases, we plan to acquire a diversified portfolio
comprised primarily of investment grade and creditworthy single-tenant
properties that are net leased for minimum periods of 10 to 25 years.
By primarily acquiring long-term single-tenant double-net and triple-net
properties, we can create an investment vehicle that produces stable and
predictable revenue that is supported by long-term leases guaranteed by
investment-grade and creditworthy corporations. In addition, single-tenant
free-standing net-leased properties leased long-term, as compared to shopping
centers, malls, office buildings, apartments and other traditional multi-tenant
complexes, typically are insulated from operating expense increases and vacancy
risk.
We will
seek to build a diversified portfolio. There is no limit to the number of
properties we acquire that may be leased to a particular tenant that we may
acquire, however, we will seek to have no more than 10% of the portfolio
concentrated in any one tenant or regional geography. The board of
directors, including a majority of the independent directors, will review our
properties and potential investments in terms of diversification. Our
profitability and our ability to diversify our investments, geographically, by
industry, by tenant and by credit will be limited by the amount of funds at our
disposal. If our assets become geographically concentrated, an economic
downturn in one or more of the markets in which we have invested could have an
adverse effect on our financial condition and our ability to make
distributions.
The
following table details the geographic distribution of our portfolio as of July
27, 2010 (dollars in thousands):
|
|
Number of
|
|
|
Square
|
|
|
Sq Ft
|
|
|
Net Operating
|
|
|
NOI
|
|
State/Possession
|
|
Properties
|
|
|
Feet
|
|
|
%
|
|
|
Income (NOI)
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALABAMA
|
|
|
2 |
|
|
|
19,029 |
|
|
|
0.7 |
% |
|
$ |
461,752 |
|
|
|
1.1 |
% |
ARIZONA
|
|
|
2 |
|
|
|
26,026 |
|
|
|
0.9 |
% |
|
|
663,984 |
|
|
|
1.6 |
% |
ARKANSAS
|
|
|
1 |
|
|
|
7,575 |
|
|
|
0.3 |
% |
|
|
187,708 |
|
|
|
0.4 |
% |
CALIFORNIA
|
|
|
5 |
|
|
|
287,908 |
|
|
|
10.0 |
% |
|
|
4,925,131 |
|
|
|
11.5 |
% |
COLORADO
|
|
|
1 |
|
|
|
8,167 |
|
|
|
0.3 |
% |
|
|
205,799 |
|
|
|
0.5 |
% |
FLORIDA
|
|
|
6 |
|
|
|
51,334 |
|
|
|
1.8 |
% |
|
|
1,758,932 |
|
|
|
4.1 |
% |
GEORGIA
|
|
|
4 |
|
|
|
43,423 |
|
|
|
1.5 |
% |
|
|
1,191,290 |
|
|
|
2.8 |
% |
ILLINOIS
|
|
|
2 |
|
|
|
24,105 |
|
|
|
0.8 |
% |
|
|
726,685 |
|
|
|
1.7 |
% |
INDIANA
|
|
|
1 |
|
|
|
13,225 |
|
|
|
0.5 |
% |
|
|
490,201 |
|
|
|
1.1 |
% |
KANSAS
|
|
|
2 |
|
|
|
473,176 |
|
|
|
16.5 |
% |
|
|
2,369,444 |
|
|
|
5.5 |
% |
LOUISIANA
|
|
|
1 |
|
|
|
7,575 |
|
|
|
0.3 |
% |
|
|
203,110 |
|
|
|
0.5 |
% |
MAINE
|
|
|
1 |
|
|
|
13,225 |
|
|
|
0.5 |
% |
|
|
338,117 |
|
|
|
0.8 |
% |
MASSACHUSETTS
|
|
|
19 |
|
|
|
127,214 |
|
|
|
4.4 |
% |
|
|
2,738,219 |
|
|
|
6.4 |
% |
MICHIGAN
|
|
|
2 |
|
|
|
24,847 |
|
|
|
0.9 |
% |
|
|
555,152 |
|
|
|
1.3 |
% |
MINNESOTA
|
|
|
1 |
|
|
|
13,013 |
|
|
|
0.5 |
% |
|
|
235,143 |
|
|
|
0.6 |
% |
MISSISSIPPI
|
|
|
3 |
|
|
|
27,944 |
|
|
|
1.0 |
% |
|
|
646,563 |
|
|
|
1.5 |
% |
MISSOURI
|
|
|
2 |
|
|
|
15,607 |
|
|
|
0.5 |
% |
|
|
467,541 |
|
|
|
1.1 |
% |
NEVADA
|
|
|
1 |
|
|
|
13,662 |
|
|
|
0.5 |
% |
|
|
264,831 |
|
|
|
0.6 |
% |
NEW
JERSEY
|
|
|
34 |
|
|
|
185,418 |
|
|
|
6.5 |
% |
|
|
2,572,081 |
|
|
|
6.0 |
% |
NEW
MEXICO
|
|
|
1 |
|
|
|
8,142 |
|
|
|
0.3 |
% |
|
|
199,198 |
|
|
|
0.5 |
% |
NEW
YORK
|
|
|
5 |
|
|
|
99,043 |
|
|
|
3.5 |
% |
|
|
3,045,824 |
|
|
|
7.1 |
% |
NORTH
CAROLINA
|
|
|
4 |
|
|
|
50,340 |
|
|
|
1.8 |
% |
|
|
1,070,901 |
|
|
|
2.5 |
% |
OHIO
|
|
|
6 |
|
|
|
53,550 |
|
|
|
1.9 |
% |
|
|
982,541 |
|
|
|
2.3 |
% |
OKLAHOMA
|
|
|
5 |
|
|
|
49,193 |
|
|
|
1.7 |
% |
|
|
1,149,193 |
|
|
|
2.7 |
% |
OREGON
|
|
|
1 |
|
|
|
2,436 |
|
|
|
0.1 |
% |
|
|
148,000 |
|
|
|
0.3 |
% |
PENNSYLVANIA
|
|
|
35 |
|
|
|
374,943 |
|
|
|
13.1 |
% |
|
|
5,680,507 |
|
|
|
13.3 |
% |
SOUTH
CAROLINA
|
|
|
2 |
|
|
|
17,117 |
|
|
|
0.6 |
% |
|
|
480,573 |
|
|
|
1.1 |
% |
TEXAS
|
|
|
18 |
|
|
|
254,469 |
|
|
|
8.9 |
% |
|
|
6,113,487 |
|
|
|
14.3 |
% |
UTAH
|
|
|
1 |
|
|
|
574,106 |
|
|
|
20.0 |
% |
|
|
2,667,669 |
|
|
|
6.2 |
% |
WASHINGTON
|
|
|
1 |
|
|
|
2,865 |
|
|
|
0.1 |
% |
|
|
199,200 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169 |
|
|
|
2,868,677 |
|
|
|
100 |
% |
|
$ |
42,738,777 |
|
|
|
100 |
% |
The
following table details the industry distribution of our portfolio as of July
27, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
Net
|
|
|
Operating
|
|
|
|
No. of
|
|
|
Square
|
|
|
Foot
|
|
|
Operating
|
|
|
Income
|
|
Industry
|
|
Buildings
|
|
|
Feet
|
|
|
%
|
|
|
Income
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
Retail
|
|
|
4 |
|
|
|
26,253 |
|
|
|
0.9 |
% |
|
$ |
468 |
|
|
|
1.1 |
% |
Auto
Services
|
|
|
18 |
|
|
|
150,935 |
|
|
|
5.3 |
% |
|
|
3,689 |
|
|
|
8.6 |
% |
Distribution
|
|
|
1 |
|
|
|
574,106 |
|
|
|
20.0 |
% |
|
|
2,668 |
|
|
|
6.2 |
% |
Freight
|
|
|
3 |
|
|
|
326,876 |
|
|
|
11.4 |
% |
|
|
6,620 |
|
|
|
15.5 |
% |
Healthcare
|
|
|
2 |
|
|
|
140,000 |
|
|
|
4.9 |
% |
|
|
1,159 |
|
|
|
2.7 |
% |
Home
Maintenance
|
|
|
1 |
|
|
|
465,600 |
|
|
|
16.2 |
% |
|
|
2,192 |
|
|
|
5.1 |
% |
Pharmacy
|
|
|
34 |
|
|
|
447,779 |
|
|
|
15.6 |
% |
|
|
11,114 |
|
|
|
26.0 |
% |
Restaurant
|
|
|
14 |
|
|
|
41,650 |
|
|
|
1.5 |
% |
|
|
2,381 |
|
|
|
5.6 |
% |
Retail
Banking
|
|
|
85 |
|
|
|
582,670 |
|
|
|
20.3 |
% |
|
|
9,249 |
|
|
|
21.6 |
% |
Specialty
Retail
|
|
|
5 |
|
|
|
44,788 |
|
|
|
1.6 |
% |
|
|
1,136 |
|
|
|
2.7 |
% |
Supermarket
|
|
|
1 |
|
|
|
59,032 |
|
|
|
2.1 |
% |
|
|
1,946 |
|
|
|
4.6 |
% |
Discount
Retail
|
|
|
1 |
|
|
|
8,988 |
|
|
|
0.3 |
% |
|
|
118 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169 |
|
|
|
2,868,677 |
|
|
|
100 |
% |
|
$ |
42,740 |
|
|
|
100 |
% |
We will
generally target properties that have remaining lease terms in excess of fifteen
years. We may acquire properties with shorter terms if the property is in
an attractive location, if the property is difficult to replace, or if the
property has other significant favorable attributes. We currently expect
all of our acquisitions will be in the United States and Commonwealth of Puerto
Rico.
There is
no limitation on the number, size or type of properties that we may acquire or
on the percentage of net proceeds of this offering that may be invested in a
single property. The number and mix of properties will depend upon real
estate market conditions and other circumstances existing at the time of
acquisition of properties and the amount of proceeds raised in this
offering. For a further description, see the section titled “— Other
Possible Investments” below.
Effective
March 31, 2009, the Board of Directors approved the recommendation of the
officers of the Company that the Company not pursue any opportunities to acquire
real property from an entity affiliated with its advisor, American Realty
Capital Advisors, LLC. The foregoing recommendation shall be reviewed
annually by the Board of Directors. On March 9, 2010, the Board of
Directors of the Company approved the recommendation of the officers of the
Company that the Company continue not to pursue any opportunities to acquire
real property from an entity affiliated with its advisor. The Board of
Directors determined that this practice will remain in effect during the
remaining term of the initial offering and the follow-on offering.
We intend
to incur debt to acquire properties where our board determines that incurring
such debt is in our best interest. In addition, from time to time, we may
acquire some properties without financing and later incur mortgage debt secured
by one or more of such properties if favorable financing terms are
available. We will use the proceeds from such loans to acquire additional
properties. See “— Borrowing Policies” under this section for a more
detailed explanation of our borrowing intentions and limitations.
American
Realty Capital, LLC, an affiliate of our Advisor, has entered into a Sourcing
Agreement with Sandler O’Neill Mortgage Finance L.P., a subsidiary of Sandler
O’Neill + Partners, L.P., whereby Sandler, in exchange for certain
considerations, will source for American Realty Capital, LLC sale-leaseback and
other real estate related acquisitions from certain banks, thrifts, credit
unions and insurance companies. Sandler shall source potential
transactions and shall exclusively offer all potential transactions to American
Realty Capital, LLC which shall have the right of first refusal. Founded
in 1988, Sandler O’Neill + Partners, L.P. is recognized throughout the
United States (and increasingly overseas) as a leader in providing the full
suite of investment banking, advisory, balance sheet management, brokerage and
research services to financial institutions and their investors. American
Realty Capital, LLC will present to us and our Advisor, with a right of first
refusal, potential transactions offered by Sandler pursuant to the sourcing
agreement. Our Advisor will recommend to us only potential transactions
that are consistent with our investment objectives and policies. Our
agreement with Sandler O’ Neill remains in effect until February
2011.
Creditworthy
Tenants
In
evaluating potential property acquisitions consistent with our investment
objectives, we will apply credit underwriting criteria to the tenants of
existing properties. Similarly, we will apply credit underwriting criteria
to possible new tenants when we are re-leasing properties in our
portfolio. Tenants of our retail properties will typically be national or
super-regional retail chains that are investment grade or otherwise creditworthy
entities having significant net worth and operating income. Generally,
these tenants must be experienced multi-unit operators with a proven track
record in order to meet the credit tests applied by our advisor. We will
apply the same rigorous underwriting standards to all of our potential tenants
in other industries.
In
analyzing potential net lease investment opportunities, the advisor will review
all aspects of a transaction, including the credit worthiness of the tenant or
borrower and the underlying real estate fundamentals to determine whether a
potential acquisition satisfies our acquisition criteria. The advisor may
consider the following aspects of each transaction:
Tenant/Borrower Evaluation.
The advisor evaluates each potential tenant or borrower for its
creditworthiness, typically considering factors such as financial condition,
management experience; industry health; industry position and fundamentals;
operating history; and capital structure, as well as other factors that may be
relevant to a particular investment. In evaluating a possible investment,
the creditworthiness of the tenant or borrower often will be a more significant
factor than the value of the underlying real estate, particularly if the
underlying property is specifically suited to the needs of the tenant; however,
in certain circumstances where the real estate is attractively valued, the
creditworthiness of the tenant may be a secondary consideration.
Properties Important to
Tenant/Borrower Operations. Our advisor will focus on properties
that it believes are essential or highly important to the ongoing operations of
the tenant, since it is anticipated that these properties provide better
protection in the event of a bankruptcy, as the tenant/borrower is less likely
to risk the loss of a mission critical lease or property in a bankruptcy
proceeding.
Diversification. The
advisor will attempt to diversify our portfolio to avoid dependence on any one
particular tenant, borrower, collateral type, geographic location or
tenant/borrower industry. By diversifying our portfolio, our advisor
reduces the adverse effect of a single under-performing investment or a downturn
in any particular industry or geographic region.
Lease Terms. Generally,
the net leased properties in which we invest will be leased on a full recourse
basis to our tenants or their affiliates. In addition, our advisor will
seek to include a clause in each lease that provides for increases in rent over
the term of the lease. These rent increases are fixed or tied generally to
increases in indices such as the CPI, and paid on specific dates. In the
case of retail stores, the lease may provide for participation in gross revenues
above stated sales levels.
Collateral Evaluation.
Our advisor reviews the physical condition of each property, and conducts
a market evaluation to determine the likelihood of replacing the rental stream
if the tenant defaults, or of a sale of the property in such
circumstances. Our advisor also generally will conduct, or require the
seller to conduct, Phase I or similar environmental site assessments in an
attempt to identify potential environmental liabilities associated with a
property prior to its acquisition. If potential environmental liabilities
are identified, we generally require that identified environmental issues be
resolved by the seller prior to property acquisition or, where such issues
cannot be resolved prior to acquisition, require tenants contractually to assume
responsibility for resolving identified environmental issues post-closing and
indemnify us against any potential claims, losses or expenses arising from such
matters. Although our advisor generally relies on its own analysis in
determining whether to make an investment, each real property purchased by us
will be appraised by an independent appraiser that is independent of our
advisor, prior to acquisition. All independent appraisers must be approved
by our independent directors. The contractual purchase price (plus direct
acquisition costs, which may not exceed fair market value, but excluding
acquisition fees, payable to our advisor) for a property we acquire will not
exceed its appraised value. The appraisals may take into consideration,
among other things, market rents, the terms and conditions of the particular
lease transaction, the quality of the lessee’s credit, the conditions of the
credit markets at the time the lease transaction is negotiated, and comparable
sales and replacement cost. The appraised value may be greater than the
construction cost or the replacement cost of a property, and the actual sale
price of a property if sold by us may be greater or less than the appraised
value. In cases of special purpose real estate, a property is examined in
light of the prospects for the tenant/borrower’s enterprise and the financial
strength and the role of that asset in the context of the tenant/borrower’s
overall viability. Operating results of properties and other collateral
may be examined to determine whether or not projected income levels are likely
to be met.
“Investment
Grade.” A tenant will be considered “investment grade” when the tenant has
a debt rating by Moody’s of Baa3 or better or a credit rating by Standard &
Poor’s or Fitch of BBB- or better, or its payments are guaranteed by a company
with such rating. In cases where a tenant does not have a Standard &
Poor’s, Moody’s or Fitch rating, we will consider a tenant to be “investment
grade” if it has received a rating of 1 or 2 by the National Association of
Insurance Commissioners (“NAIC”) on a debt private placement or is a wholly
owned subsidiary of a parent company, constituting a majority of the parent
company’s assets, and the parent company has a debt rating by Moody’s of Baa3 or
better or a credit rating by Standard & Poor’s or Fitch of BBB – or better.
NAIC 1 is assigned to obligations exhibiting the highest quality. Credit
risk is at its lowest and the issuer’s credit profile is stable. NAIC 2 is
assigned to obligations of high quality. Credit risk is low but may increase in
the intermediate future and the issuer’s credit profile is reasonably
stable. Changes in tenant credit ratings, coupled with future acquisition
and disposition activity, may increase or decrease our concentration of
investment grade tenants in the future.
Moody’s,
Standard & Poor’s and Fitch’s ratings are opinions of future relative
creditworthiness or expected loss based on an evaluation of franchise value,
financial statement analysis and management quality. The rating given to a debt
obligation describes the level of risk associated with receiving full and timely
payment of principal and interest on that specific debt obligation and how that
risk compares with that of all other debt obligations. It is expected that lower
rated entities and obligations will default, on average, at a higher frequency
than more highly rated entities and obligations.
A Moody’s
debt rating of Baa3, which is the lowest investment grade rating given by
Moody’s, is assigned to companies with adequate financial security. However,
certain protective elements may be lacking or may be unreliable over any given
period of time. Standard & Poor’s assigns a credit rating to both companies
as a whole and to each issuance or class of a company’s debt. A Standard &
Poor’s or Fitch credit rating of BBB-, which is the lowest investment grade
rating given by Standard & Poor’s and Fitch, is assigned to companies that
exhibit adequate protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the
company to meet its financial commitments. Thus, investment grade tenants will
be judged by Standard & Poor’s and Fitch to have at least adequate
protection parameters, and will in some cases have extremely strong financial
positions.
Description
of Net Leased Assets
We
currently expect that most of our property acquisitions will be of long-term,
freestanding net leased assets. We expect many of our long-term net leased
asset acquisitions will be through sale-leaseback transactions, in which we
acquire properties directly from companies that simultaneously lease the
properties back from us. These sale-leaseback transactions provide the
lessee company with a source of capital that is an alternative to other
financing sources such as corporate borrowing, real property mortgages, or sales
of shares of common stock.
We
typically purchase single-tenant properties with existing “net” leases, and when
spaces become vacant or existing leases expire we anticipate entering into “net”
leases. “Net” leases means leases that typically require that tenants pay
all or a majority of the property’s operating expenses, including real estate
taxes, special assessments and sales and use taxes, utilities, insurance and
building repairs related to the property, in addition to the lease
payments. There are various forms of net leases, typically classified as
triple net or double net. Triple-net (NNN) leases typically require the
tenant to pay all costs associated with a property in addition to the base rent
and percentage rent, if any. Double-net (NN) leases typically have the
landlord responsible for the roof and structure, or other aspects of the
property, while the tenant is responsible for all remaining expenses associated
with the property. In the event that we acquire multi-tenant properties,
we expect to have a variety of lease arrangements with the tenants of such
properties. Since each lease is an individually negotiated contract
between two or more parties, each contract will have different obligations of
both the landlord and tenant. Many large national retail tenants have
standard lease forms that generally do not vary from property to property, and
we will have limited ability to revise the terms of leases to those
tenants. At this time, the various obligations of the landlord and tenant
under the leases to be associated with our properties have not been determined.
As of July 27, 2010 our properties are 100% leased. Lease expirations occur
between 2016 and 2035 with an average remaining lease term of 15.3
years.
We
anticipate that a majority of our acquisitions will have minimum, non-cancelable
lease terms of ten to twenty-five years or greater at the time of the
acquisition. We may acquire properties under which the lease term has
partially expired. We also may acquire properties with shorter lease terms
if the property is in an attractive location, if the property is difficult to
replace, or if the property has other significant favorable real estate
attributes. Under most commercial leases, tenants are obligated to pay a
predetermined annual base rent. Some of the leases also will contain
provisions that increase the amount of base rent payable at points during the
lease term and/or percentage rent that can be calculated by a number of
factors. Under triple- and double-net leases, the tenants are generally
required to pay the real estate taxes, insurance, utilities and common area
maintenance charges associated with the properties. Generally, the leases
will require each tenant to procure, at its own expense, commercial general
liability insurance, as well as property insurance covering the building for the
full replacement value and naming the ownership entity and the lender, if
applicable, as the additional insured on the policy. As a precautionary
measure, our advisor may obtain, to the extent available, secondary liability
insurance, as well as loss of rents insurance that covers one year of annual
rent in the event of a rental loss. The secondary insurance coverage names
the ownership entity as the named insured on the policy. The insurance
coverage will insure American Realty Capital Trust, Inc. and any entity
formed under it. Some leases may require that we procure the insurance for
both commercial general liability and property damage insurance; however, the
premiums are fully reimbursable from the tenant. In the event that we
procure such insurance, the policy will list us as the named insured on the
policy and the tenant as the additional insured. Tenants will be required
to provide proof of insurance by furnishing a certificate of insurance to our
advisor on an annual basis. The insurance certificates will be carefully
tracked and reviewed for compliance by our advisor’s property management
department.
In
general, leases may not be assigned or subleased without our prior written
consent. If we do consent to an assignment or sublease, the original
tenant generally will remain fully liable under the lease unless we release that
tenant from its obligations under the lease.
Environmental
Matters
All real
property and the operations conducted on real property are subject to federal,
state and local laws and regulations relating to the injury to, or the pollution
of the environment and the protection of human health and safety. These
laws and regulations generally govern releases and discharges of pollutants into
the air, water or soil, the use, storage, treatment, transportation and disposal
of hazardous substances and wastes, and the remediation of contamination
associated with such releases, discharges, maintenance and disposal. State
and federal laws in this area, or the interpretation thereof, may become more
stringent in the future, and we intend to monitor these laws and take
commercially reasonable steps to protect ourselves from the impact of these
laws, including obtaining environmental assessments of most properties that we
acquire.
Other
Possible Investments
Although
we expect that most of our property acquisitions will be of the type described
above, we may make other investments to expand and diversify our
portfolio. We expect to invest primarily in commercial properties leased
to a diversified group of companies on a single-tenant net lease basis and in
other real estate related assets. At this time we are unable to predict
what percentage of our assets may consist of investments other than long-term
net leases. We may also invest in other commercial properties (such as
business and industrial parks, manufacturing facilities, convenience stores and
warehouse and distribution facilities,) in order to reduce overall portfolio
risks or enhance overall portfolio returns if our advisor and board of directors
determine that it would be advantageous to do so when opportunities arise.
Further, to the extent that our advisor and board of directors determine it is
in our best interest, due to the state of the real estate market, in order to
diversify our investment portfolio or otherwise, we will make or invest in
mortgage loans, including, bridge loans or mezzanine loans secured by the same
types of commercial properties that we intend to acquire.
Our
criteria for investing in mortgage loans will be substantially the same as those
involved in our investment in properties. We do not intend to make loans
to other persons (other than mortgage loans), to underwrite securities of other
issuers or to engage in the purchase and sale of any types of investments other
than interests in real estate. We do not plan to make investments in
sub-prime mortgages.
Investment
Decisions
American
Realty Capital Advisors, LLC will have substantial discretion with respect to
the selection of specific investments and the purchase and sale of our
properties, subject to the approval of our board of directors. In pursuing
our investment objectives and making investment decisions for us, American
Realty Capital Advisors, LLC will evaluate the proposed terms of the purchase
against all aspects of the transaction, including the condition and financial
performance of the property, the terms of existing leases and the
creditworthiness of the tenant, terms of the lease and property and location
characteristics. Because the factors considered, including the specific
weight we place on each factor, will vary for each potential investment, we do
not, and are not able to, assign a specific weight or level of importance to any
particular factor.
In
addition to procuring and reviewing an independent valuation estimate and
property condition report, our advisor also will, to the extent such information
is available, consider the following:
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Creditworthiness
of the tenant;
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Physical
appearance and condition of the
property;
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Economic
conditions affecting the immediate and surrounding trade area of the
property;
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Alternative
uses of the property;
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Property
operating performance; and
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Our
advisor will consider whether properties are leased by, or have leases
guaranteed by, companies that maintain an investment grade rating by Standard
& Poor’s, Moody’s Investor Services or Fitch, Inc.. Our advisor also will
consider non-rated and non-investment grade rated tenants that we consider
creditworthy, as described in “ — Investment Grade and Other Creditworthy
Tenants” above.
Our
advisor will review the terms of each existing lease by considering various
factors, including, rent escalations, remaining lease term, renewal option
terms, tenant purchase options, termination options, scope of the landlord’s
maintenance, repair and replacement requirements, projected net cash flow yield,
and projected internal rates of return.
Conditions
to Closing Our Acquisitions
Generally,
we will condition our obligation to close the purchase of any investment on the
delivery and verification of certain documents from the seller or developer,
including, where appropriate:
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plans
and specifications
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evidence
of marketable title, subject to such liens and encumbrances as are
acceptable to American Realty Capital Advisors,
LLC
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financial
statements covering recent operations of properties having operating
histories
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title
and liability insurance policies
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tenant
estoppel certificates.
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We
generally will not purchase any property unless and until we also obtain what is
generally referred to as a “Phase I” environmental site assessment and are
generally satisfied with the environmental status of the property.
However, we may purchase a property without obtaining such assessment if our
advisor determines it is not warranted. A Phase I environmental site
assessment basically consists of a visual survey of the building and the
property in an attempt to identify areas of potential environmental
concerns. In addition, a visual survey of neighboring properties is
conducted to assess surface conditions or activities that may have an adverse
environmental impact on the property. Furthermore, local governmental
agency personnel are contacted who perform a regulatory agency file search in an
attempt to determine any known environmental concerns in the immediate vicinity
of the property. A Phase I environmental site assessment does not
generally include any sampling or testing of soil, ground water or building
materials from the property, and may not reveal all environmental hazards on a
property. We expect that in most cases we will request, but will not
always obtain, a representation from the seller that, to its knowledge, the
property is not contaminated with hazardous materials. Additionally, many
of our leases will contain clauses that require a tenant to reimburse and
indemnify us for any environmental contamination occurring at the
property.
We may
enter into purchase and sale arrangements with a seller or developer of a
suitable property under development or construction. In such cases, we
will be obligated to purchase the property at the completion of construction,
provided that the construction conforms to definitive plans, specifications, and
costs approved by us in advance. In such cases, prior to our acquiring the
property, we generally would receive a certificate of an architect, engineer or
other appropriate party, stating that the property complies with all plans and
specifications. If renovation or remodeling is required prior to the
purchase of a property, we expect to pay a negotiated maximum amount to the
seller upon completion. We do not currently intend to construct or develop
properties or to render any services in connection with such development or
construction.
In
determining whether to purchase a particular property, we may, in accordance
with customary practices, obtain an option on such property. The amount
paid for an option, if any, normally is surrendered if the property is not
purchased and normally is credited against the purchase price if the property is
purchased.
In
purchasing, leasing and developing properties, we will be subject to risks
generally incident to the ownership of real estate. See “Risk Factors —
General Risks Related to Investments in Real Estate.”
Ownership
Structure
Our core
investment strategy is to acquire, own and manage a portfolio of commercial
properties leased to a diversified group of companies on a single-tenant net
lease basis. These leases generally require the tenant to pay
substantially all of the costs associated with operating and maintaining the
property such as maintenance, insurance, taxes, structural repairs and other
operating and capital expenses (referred to as triple-net leases).
We
currently expect that most of our property acquisitions will be through
long-term net leased assets. We expect many of our long-term net leased
asset acquisitions will be through long-term sale leaseback transactions, in
which we acquire properties from companies that simultaneously lease the
properties back from us. These sale-leaseback transactions provide the
lessee company with a source of capital that is an alternative to other
financing sources such as corporate borrowing, real property mortgages, or share
sales of common stock. We will attempt to structure such sale-leaseback
transaction so that the lease will be characterized as a “true lease,” so that
we will be treated as the owner of the property for U.S. federal income tax
purposes. However, the Internal Revenue Service could challenge this
characterization. In the event that any sale-leaseback transaction is
recharacterized as a financing transaction for U.S. federal income tax purposes,
deductions for depreciation and cost recovery relating to such property would be
disallowed. See “Material U.S. Federal Income Tax Considerations —
Sale-Leaseback Transactions.”
Such
investments may take the form of holding fee title or a long-term leasehold
estate. We will acquire such interests either directly through our
operating partnership, or indirectly through limited liability companies,
limited partnerships, or through investments in joint ventures, partnerships,
co-tenancies or other co-ownership arrangements with the developers of the
properties, affiliates of American Realty Capital Advisors, LLC or other
persons. See the section captioned “Our Operating Partnership Agreement”
elsewhere in this prospectus and the “— Joint Venture Investments” section
below.
Joint
Venture Investments
We may
enter into joint ventures, partnerships, co-tenancies and other co-ownership
arrangements with third parties as well as affiliated entities, including other
real estate programs sponsored by affiliates of our advisor for the acquisition,
development or improvement of properties with affiliates of our advisor,
including other real estate programs sponsored by affiliates of our
advisor. We may also enter into such arrangements with real estate
developers, owners and other unaffiliated third parties for the purpose of
developing, owning and operating real properties. In determining whether
to invest in a particular joint venture, American Realty Capital Advisors, LLC
will evaluate the real property that such joint venture owns or is being formed
to own under the same criteria described above in “— Investment Decisions” for
the selection of our real estate property investments.
Our
general policy is to invest in joint ventures only when we will have a right of
first refusal to purchase the co-venturer’s interest in the joint venture if the
co-venturer elects to sell such interest. In the event that the
co-venturer elects to sell property held in any such joint venture, however, we
may not have sufficient funds to exercise our right of first refusal to buy the
other co-venturer’s interest in the property held by the joint venture. In
the event that any joint venture with an affiliated entity holds interests in
more than one property, the interest in each such property may be specially
allocated based upon the respective proportion of funds invested by each
co-venturer in each such property.
American
Realty Capital Advisors, LLC may have conflicts of interest in determining which
American Realty Capital-sponsored program should enter into any particular joint
venture agreement. The co-venturer may have economic or business interests
or goals that are or may become inconsistent with our business interests or
goals. In addition, American Realty Capital Advisors, LLC may face a
conflict in structuring the terms of the relationship between our interests and
the interest of the affiliated co-venturer and in managing the joint
venture. Since American Realty Capital Advisors, LLC and its affiliates
will control both the affiliated co-venturer and, to a certain extent, us,
agreements and transactions between the co-venturers with respect to any such
joint venture will not have the benefit of arm’s-length negotiation of the type
normally conducted between unrelated co-venturers, which may result in the
co-venturer receiving benefits greater than the benefits that we receive.
In addition, we may have liabilities that exceed the percentage of our
investment in the joint venture.
We may
enter into joint ventures with other American Realty Capital real estate
programs only if a majority of our directors not otherwise interested in the
transaction and a majority of our independent directors approve the transaction
as being fair and reasonable to us and on substantially the same terms and
conditions as those received by other joint venturers.
Borrowing
Policies
Our
advisor believes that utilizing borrowing is consistent with our investment
objective of maximizing the return to investors. By operating on a
leveraged basis, we will have more funds available for investment in
properties. This will allow us to make more investments than would
otherwise be possible, resulting in a more diversified portfolio. There is
no limitation on the amount we may borrow against any single improved
property. However, under our charter, we are required to limit our
borrowings to 75% of the greater of the aggregate cost (before deducting
depreciation or other non-cash reserves) or the aggregate fair market value of
our gross assets as of the date of any borrowing (and to 300% of our net assets
(as defined in our charter)), unless excess borrowing is approved by a majority
of the independent directors and disclosed to our stockholders in the next
quarterly report along with the justification for such excess borrowing.
In the event that we issue preferred stock that is entitled to a preference over
the common stock in respect of distributions or liquidation or is treated as
debt under GAAP, we will include it in the leverage restriction calculations,
unless the issuance of the preferred stock is approved or ratified by our
stockholders. We expect that during the period of this offering we will
request that our independent directors approve borrowings in excess of this
limitation since we will then be in the process of raising our equity capital to
acquire our portfolio. However, we anticipate that our overall leverage
following our offering stage will be within our charter limit.
Our
advisor will use its best efforts to obtain financing on the most favorable
terms available to us. All of our financing arrangements must be approved
by a majority of our board members including a majority of our independent
directors. Lenders may have recourse to assets not securing the repayment
of the indebtedness.
Our
advisor may refinance properties during the term of a loan only in limited
circumstances, such as when a decline in interest rates makes it beneficial to
prepay an existing mortgage, when an existing mortgage matures or if an
attractive investment becomes available and the proceeds from the refinancing
can be used to purchase such investment. The benefits of the refinancing
may include increased cash flow resulting from reduced debt service
requirements, an increase in dividend distributions from proceeds of the
refinancing, if any, and an increase in property ownership is some refinancing
proceeds are reinvested in real estate.
Our
ability to increase our diversification through borrowing may be adversely
impacted if banks and other lending institutions reduce the amount of funds
available for loans secured by real estate. When interest rates on
mortgage loans are high or financing is otherwise unavailable on a timely basis,
we may purchase properties for cash with the intention of obtaining a mortgage
loan for a portion of the purchase price at a later time. To the extent
that we do not obtain mortgage loans on our properties, our ability to acquire
additional properties will be restricted and we may not be able to adequately
diversify our portfolio.
We may
not borrow money from any of our directors or from our advisor or its affiliates
unless such loan is approved by a majority of the directors not otherwise
interested in the transaction (including a majority of the independent
directors) as fair, competitive and commercially reasonable and no less
favorable to us than a comparable loan between unaffiliated
parties.
As
approved by all of our independent directors pursuant to our charter, the
advisor may lend to American Realty Capital Operating Partnership, LP up to ten
million dollars ($10,000,000) from time to time as needed to provide short-term
financing relating to property acquisitions. Such borrowed funds will be
repaid within 180 days or sooner, not subject to a pre-payment penalty, and will
accrue interest at a fair and competitive (commercially reasonable) rate of
interest.
Our
operating partnership may, with the approval from our independent board of
directors, utilize unsecured revolving equity lines in connection with property
acquisitions as opportunities present themselves, which equity shall be repaid
as we raise common equity. Currently, we have one such equity lines:
(1) up to $10 million dollars provided by certain managing principals of
American Realty Capital II, LLC, which as of July 27, 2010 has been paid in
full
In
addition, short-term bridge equity facilities may be obtained from third parties
on a case-by-case basis as acquisition opportunities present themselves
simultaneous with our capital raising efforts. We view the use of
short-term equity facilities as an efficient and accretive means of acquiring
real estate in advance of raising equity capital. Accordingly, we can take
advantage of buying opportunities as we expand our fund raising
activities. A third party contributed a total of approximately $8 million
of preferred but unsecured equity towards the acquisition of the Harleysville
Properties and the Rockland Properties. The preferred equity in the
Rockland Properties was convertible into shares of common stock in the
REIT. The balances have been paid in full.
On July
27, 2010, through our operating partnership, we entered into a credit agreement
with Capital One, N.A. to obtain a secured revolving credit facility in an
aggregate maximum principal amount of $30,000,000. The proceeds of loans
made under the credit agreement shall be used to finance the acquisition of net
leased, investment or non-investment grade properties. The initial term of
the credit agreement is 30 months, which may be extended by 12 months, subject
to satisfaction of certain conditions, including payment of an extension
fee.
Any loan
made under the credit agreement shall bear floating interest at per annum rates
equal to either one month LIBOR plus 3.25% or three month LIBOR plus 3.25%, at
our sole option. In the event of a default, Capital One, N.A. has the
right to terminate its obligations under the credit agreement, including the
funding of future loans, and to accelerate the payment on any unpaid principal
amount of all outstanding loans.
We intend
to collateralize the line of credit with certain properties which we currently
own or will acquire. We have not yet drawn on the Line of Credit which
shall be used to augment our acquisition activities.
Diversification
Through Real Estate
Traditionally,
investment portfolios have contained a balance of stocks, bonds, mutual funds
and cash equivalents. To the extent investors seek portfolio
diversification through real estate ownership, they often select publicly-traded
real estate companies, primarily REITs. The issue with these REITs and
other exchange traded companies, is that they tend to be closely correlated to
the broader equities market, thus defeating, in part, the rationale for owning
this asset category. Investing in a private REIT such as ours may add an
additional level of diversification and a low correlation to investments listed
on the public exchanges. Moreover, such an investment may augment current
returns, provide income growth, furnish asset appreciation, and allow ownership
of a high quality, diversified portfolio of real estate.
Diversification
is a strategy designed to reduce exposure to portfolio risk by combining a
variety of investments which are unlikely to appreciate or depreciate at the
same time. One way to diversify an existing portfolio of stocks and bonds
is to add real estate to the portfolio mix. Because most investors cannot
build a sufficiently diverse portfolio of real estate on their own, they may
choose to invest in either publicly traded or non-traded Real Estate Investment
Trusts (“REITs”). (See: “What is a REIT” in the FAQs).
Change
in Value From Year to Year
Past
performance is no guarantee of future results.
NCREIF
Index: The National Council of Real Estate Investment Fiduciaries index is
an unmanaged, market-weighted index of non-traded, unleveraged properties owned
by tax exempt entities. NCREIF was established to serve the institutional
real estate investment community as a non-partisan collector, processor,
validator and disseminator of real estate performance information. NCREIF
members, like us, are not traded on any public exchange. NCREIF includes
dividends.
NAREIT
Index: The NAREIT Equity REIT Index is an unmanaged, market-weighted index
of publicly-traded, tax-qualified REITs traded on the New York Stock Exchange,
the American Stock Exchange and the NASDAQ Stock Market System. NAREIT
includes dividends.
S&P
500 Index: The Standard & Poor’s 500 Index is an unmanaged,
capitalization-weighted index of 500 stocks. The index is designed to
measure performance of the broad domestic economy through changes in the
aggregate market value of 500 stocks representing all major industries and is
adjusted to reflect dividends paid.
The chart
above shows that the S&P 500 and NAREIT indices have exhibited significant
volatility from 1997 to 2009. NCREIF, on the other hand, has returned
stable and predictable returns year after year.
Direct
Private Placements as an Alternative to Traditional Investment
Vehicles
While the
chart above tracks changes in value from 1997 to June 30, 2010 in the S&P
500, NAREIT and NCREIF indices the diagram below follows the growth of one
dollar invested in these same 3 indices during the same time
period.
$1
Invested in 1997
Sources:
NAREIT, NCREIF and S&P 500
The chart
shows that over the last 12 years real estate has outperformed the S&P 500,
and that within the real estate sector itself, the NCREIF index has out
performed publicly traded REITs. The value of one dollar invested in
NAREIT almost tripled over the 10 year period in question, while one dollar
invested in NCREIF more than tripled while demonstrating more consistent
performance. During this time period the S&P 500 proved to be a less
successful investment than either NAREIT or NCREIF. As you can see from
comparing the two immediately preceding charts the S&P 500 was the most
volatile index, while achieving the lowest comparative returns. The value
of the NCREIF index is computed as follows: NCREIF requires that
properties included in the NPI be valued at least quarterly, either internally
or externally, using standard commercial real estate appraisal
methodology. Each property must be independently appraised a minimum of
once every three years. The value of the capital component of the NCREIF
index return is predominately the product of the real property appraisals
discussed below. In addition, property income results are reported
quarterly for purposes of determining the income component of the
index.
However,
the NAREIT index, while only slightly underperforming the NCREIF index, has
exhibited much more volatility. NAREIT is comprised of publicly traded
REITs, and stock prices are highly susceptible to broader market
movements. The NCREIF index, however, is not correlated to the public
securities markets.
This
means that NCREIF members and their investors are less susceptible to severe
market movements. Not being listed on an exchange aligns management and
the investors’ incentives to view the investment over a longer investment
horizon.
In
addition to being an important tool in portfolio diversification, real estate is
considered to be a good hedge against inflation. We believe that our
portfolio can act as an inflation hedge because of the contractual rent
increases in many of our leases. However, actual results from operations
and, accordingly, cash available for distribution, will be affected by a number
of factors, including the rents we receive from our tenants, our financing
costs, the ability of our tenants to meet their lease obligations, and
unanticipated expenditures not otherwise paid by the tenant.
In
addition to being an important tool in portfolio diversification and enjoying
lower volatility, real estate is considered to be a good hedge against
inflation. We believe that our portfolio can act as an inflation hedge
because of the contractual rent increases that are built into many of our
leases. As a result of such increases, additional revenue should increase
the amount of cash available for distribution to our stockholders.
However, our actual results of operations and, accordingly, cash available for
distribution, will be affected by a number of factors, including the revenue we
receive from our tenants, our debt obligations, interest expense, the ability of
our tenants to meet their obligations, and unanticipated
expenditures.
The
qualifications for valuation of investments in the NCREIF Property Index (“NPI”)
are:
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Operating
properties only.
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Property
types — apartments, hotels, industrial properties, office buildings, and
retail only.
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Can
be wholly owned or in a joint venture
structure.
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Investment
returns are reported on a non-leveraged basis. While there are
properties in the index that have leverage, returns are reported to NCREIF
as if there is no leverage.
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Must
be owned/controlled by a qualified tax-exempt institutional investor or
its designated agent.
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Existing
properties only (no development
projects).
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Calculations
are based on quarterly returns of individual properties before deduction
of asset management fees.
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Each
property’s return is weighted by its market
value.
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Income
and Capital Appreciation changes are also
calculated.
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The
NPI is a quarterly time series composite total rate of return measure of
investment performance of a very large pool of individual commercial real
estate properties acquired in the private market for investment purposes
only. All properties in the NPI have been acquired, at least in
part, on behalf of tax-exempt institutional investors — the great majority
being pension funds. As such, all properties are held in a fiduciary
environment.
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Properties
in the NPI are accounted for using market value accounting
standards. Data contributed to NCREIF is expected to comply with the
Regional Economic Information System (REIS, Inc.). Because the NPI
measures performance at the property level without considering investment
or capital structure arrangements, information reported to the index will
be different from information reported to investors. For example,
interest expense reported to investors would not be included in the
NPI. However, because the property information reported to the index
is expected to be derived from the same underlying books and records,
because it is expected to form the underlying basis for investor
reporting, and because accounting methods are required to be consistent,
fundamentally consistent information expectations
exist.
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NCREIF
requires that properties included in the NPI be valued at least quarterly,
either internally or externally, using standard commercial real estate
appraisal methodology. Each property must be independently appraised
a minimum of once every three
years.
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Because
the NPI is a measure of private market real estate performance, the
capital value component of return is predominately the product of property
appraisals. As such, the NPI is often referred to as an “appraisal
based index.”
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Shareholders
should not expect the same performance as the NPI because the NPI does not
factor in the fees or expenses that we are subject to.
Making
Loans and Investments in Mortgages
We may,
from time to time, make mortgage, bridge or mezzanine loans and other loans that
qualify as such under Internal Revenue Service REIT rules and other loans
relating to real property, including loans in connection with the acquisition of
investments in entities that own real property. Although we do not have a
formal policy, our criteria for investing in loans will be substantially the
same as those involved in our investment in properties.
We will
not make or invest in mortgage, bridge or mezzanine loans unless we obtain an
appraisal concerning the underlying property from a certified independent
appraiser except for mortgage, bridge or mezzanine loans insured or guaranteed
by a government or government agency. We will maintain each appraisal in
our records for at least five years, and will make it available during normal
business hours for inspection and duplication by any stockholder at such
stockholder’s expense. In addition to the appraisal, we will seek to
obtain a customary lender’s title insurance policy or commitment as to the
priority of the mortgage or condition of the title.
We will
not make or invest in mortgage, bridge or mezzanine loans on any one property if
the aggregate amount all mortgage, bridge or mezzanine loans outstanding on the
property, including our borrowings, would exceed an amount equal to 85% of the
appraised value of the property, unless substantial justification exists.
Our charter contains numerous additional limitations on us with respect to the
manner in which we may invest our funds, including the manner in which we may
make or invest in mortgage, bridge or mezzanine loans in cases in which we
believe there is a high probability of our foreclosure upon the property in
order to acquire the underlying assets and in which the cost of the mortgage
loan investment does not exceed the appraised value of the underlying
property. Our board of directors may find such justification in connection
with the purchase of mortgage, bridge or mezzanine loans that are in default
where we intend to foreclose upon the property in order to acquire the
underlying assets and where the cost of the mortgage loan investment does not
exceed the appraised value of the underlying property. See “— Investment
Limitations.”
Subject
to the limitations contained in our charter, we may invest in first, second and
third mortgage, bridge or mezzanine loans, wraparound mortgage, bridge or
mezzanine loans, construction mortgage, bridge or mezzanine loans on real
property, and loans on leasehold interest mortgages. We also may invest in
participations in mortgage, bridge or mezzanine loans. Second and
wraparound mortgage, bridge or mezzanine loans are secured by second or
wraparound deeds of trust on real property that is already subject to prior
mortgage indebtedness, in an amount that when added to the existing
indebtedness, does not generally exceed 75% of the appraised value of the
mortgage property. A wraparound loan is one or more junior mortgage,
bridge or mezzanine loans having a principal amount equal to the outstanding
balance under the existing mortgage loan, plus the amount actually to be
advanced under the wraparound mortgage loan. Under a wraparound loan, we
would generally make principal and interest payments on behalf of the borrower
to the holders of the prior mortgage, bridge or mezzanine loans. Third
mortgage, bridge or mezzanine loans are secured by third deeds of trust on real
property that is already subject to prior first and second mortgage
indebtedness, in an amount that, when added to the existing indebtedness, does
not generally exceed 75% of the appraised value of the mortgage property.
Construction loans are loans made for either original development or renovation
of property. Construction loans in which we would generally consider an
investment would be secured by first deeds of trust on real property for terms
of six months to two years. In addition, if the mortgage property is being
developed, the amount of the construction loan generally will not exceed 75% of
the post-development appraised value. Loans on leasehold interests are
secured by an assignment of the borrower’s leasehold interest in the particular
real property. These loans are generally for terms of from six months to
15 years. Leasehold interest loans generally do not exceed 75% of the
value of the leasehold interest and require personal guaranties of the
borrowers. The leasehold interest loans are either amortized over a period
that is shorter than the lease term or have a maturity date prior to the date of
the lease terminates. These loans would generally permit us to cure any
default under the lease. Mortgage participation investments are
investments in partial interests of mortgages of the type described above that
are made and administered by third-party mortgage lenders.
In
evaluating prospective loan investments, our advisor will consider factors such
as the following:
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the
ratio of the amount of the investment to the value of the property by
which it is secured;
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in
the case of loans secured by real property or loans otherwise dependent on
real property for payment:
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the
property’s potential for capital appreciation or
depreciation;
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expected
levels of rental and occupancy
rates;
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current
and projected cash flow of the
property;
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potential
for rental increases or decreases;
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the
degree of liquidity of the
investment;
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geographic
location of the property;
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the
condition and use of the property;
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the
property’s income-producing
capacity;
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the
quality, experience and creditworthiness of the
borrower;
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general
economic conditions in the area where the property is located or that
otherwise affect the borrower; and
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any
other factors that the advisor believes are
relevant.
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We may
originate loans from mortgage brokers or personal solicitations of suitable
borrowers, or may purchase existing loans that were originated by other
lenders. Our advisor will evaluate all potential loan investments to
determine if the term of the loan, the security for the loan and the
loan-to-value ratio meets our investment criteria and objectives. An
officer, director, agent or employee of our advisor will inspect the property
securing the loan, if any, during the loan approval process. We do not
expect to make or invest in mortgage or mezzanine loans with a maturity of more
than ten years from the date of our investment, and anticipate that most loans
will have a term of five years. We do not expect to make or invest in
bridge loans with a maturity of more than one year (with the right to extend the
term for an additional one year) from the date of our investment. Most
loans which we will consider for investment would provide for monthly payments
of interest and some may also provide for principal amortization, although many
loans of the nature which we will consider provide for payments of interest only
and a payment of principal in full at the end of the loan term. We will
not originate loans with negative amortization provisions.
We do not
have any policy that limits the amount that we may invest in any single loan or
the amount we may invest in loans to any one borrower. Pursuant to our
advisory agreement, our advisor will be responsible for servicing and
administering any mortgage, bridge or mezzanine loans in which we
invest.
Our loan
investments may be subject to regulation by federal, state and local authorities
and subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, including among other things, regulating
credit granting activities, establishing maximum interest rates and finance
charges, requiring disclosures to customers, governing secured transactions and
setting collection, repossession and claims handling procedures and other trade
practices. In addition, certain states have enacted legislation requiring
the licensing of mortgage bankers or other lenders and these requirements may
affect our ability to effectuate our proposed investments in mortgage, bridge or
mezzanine loans. Commencement of operations in these or other
jurisdictions may be dependent upon a finding of our financial responsibility,
character and fitness. We may determine not to make mortgage, bridge or
mezzanine loans in any jurisdiction in which the regulatory authority believes
that we have not complied in all material respects with applicable
requirements.
As
approved by all of our independent directors pursuant to our charter, the
advisor may lend to American Realty Capital Operating Partnership, LP up to ten
million dollars ($10,000,000) from time to time as needed to provide short-term
financing relating to property acquisitions. Such borrowed funds will be
repaid within 180 days or sooner, not subject to a pre-payment penalty, and will
accrue interest at a fair and competitive (commercially reasonable) rate of
interest.
Acquisition
of Properties from Affiliates
Effective
March 31, 2009, the Board of Directors approved the recommendation of the
officers of the Company that the Company not pursue any opportunities to acquire
real property from an entity affiliated with its advisor, American Realty
Capital Advisors, LLC. It was determined that the foregoing recommendation
would be reviewed annually by the Board of Directors. On March 9, 2010,
the Board of Directors of the Company approved the recommendation of the
officers of the Company that the Company continue not to pursue any
opportunities to acquire real property from an entity affiliated with its
advisor. The Board of Directors determined that this practice will remain in
effect during the remaining term of the initial offering.
We may in
the future, with the approval of our board of directors, change our policy
against acquiring properties from entities affiliated with us and acquire
properties or interests in properties from or in co-ownership arrangements with
affiliated entities, including properties acquired from affiliates engaged in
construction and development of commercial real properties. We intend to
pay incentive fees or real estate commissions at market rates consistent with
amounts generally charged for similar services in the area by unaffiliated
parties. We will not acquire any property from an affiliate unless a
majority of our directors, including independent directors, not otherwise
interested in the transaction determine that the transaction is fair and
reasonable to us. The purchase price that we will pay for any property we
acquire from our affiliates, including property developed by an affiliate as
well as property held by an affiliate that has already been developed, may not
exceed the current appraised value of the property, which must be determined by
a qualified independent appraiser selected by our independent directors.
In addition, a majority of our directors, including independent directors, not
otherwise interested in the transaction must determine that the price of the
property we acquire from an affiliate does not exceed the cost of the property
to our affiliate, or, if the price of the property we acquire from an affiliate
exceeds such cost, that substantial justification for the excess exists and the
excess is reasonable.
In the
case of properties we acquire from an affiliate that have not been constructed
at the time of contracting, our affiliate will generally be required to obtain
an independent “as built” appraisal for the property prior to our contracting
for the property, in which case the purchase price we will pay under the
purchase contract will not exceed the anticipated fair market value of the
developed property as determined by the appraisal. Our contract with any
affiliate engaged in development of properties for sale to us will require it to
deliver to us at closing title to the property, as well as an assignment of
leases.
In the
case of properties to be developed by any of our affiliates and sold to us, if
any of our affiliates develop properties, we anticipate that our development
company affiliate will:
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acquire
a parcel of land;
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enter
into contracts for the construction and development of a commercial
building thereon;
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enter
into an agreement with one or more tenants to lease all or a majority of
the property upon its completion;
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secure
an earnest money deposit from us, which may be used for acquisition and
development expenses;
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secure
a financing commitment from a commercial bank or other institutional
lender to finance the remaining acquisition and development
expenses;
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complete
the development and allow the tenant or tenants to take possession of the
property; and
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provide
for the acquisition of the property by
us.
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We will
be required to pay a substantial sum to our development company affiliate at the
time of entering into the contract as a refundable earnest money deposit to be
credited against the purchase price at closing, which will be applied to the
cost of acquiring the land and initial development costs. We expect that
the earnest money deposit will represent approximately 20% to 30% of the
purchase price of the developed property set forth in the purchase
contract.
We may
enter into a contract to acquire property from an affiliate engaged in property
development even if we have not yet raised sufficient proceeds to enable us to
pay the full amount of the purchase price at closing. We may also elect to
close a purchase before the development of the property has been completed, in
which case we would obtain an assignment of the construction and development
contracts from our affiliate and would complete the construction either directly
or through a joint venture with an affiliate. Any contract between us,
directly or indirectly through a joint venture with an affiliate, and an
affiliated development company for the purchase of property to be developed will
provide that we will be obligated to purchase the property only if:
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the
affiliated development company completes the improvements, which generally
will include the completion of the development, in accordance with the
specifications of the contract, and at the agreed upon
price;
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one
or more approved tenants takes possession of the building under a lease
satisfactory to our advisor, and executes an estoppel;
and
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we
have sufficient proceeds available for investment at closing to pay the
balance of the purchase price remaining after payment of the earnest money
deposit.
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Our
advisor will not cause us to enter into a contract to acquire property from an
affiliated development company if it does not reasonably anticipate that funds
will be available to purchase the property at the time of closing. If we
enter into a contract to acquire property from an affiliated development company
and, at the time for closing, are unable to purchase the property because we do
not have sufficient proceeds available for investment, we will not be required
to close the purchase of the property and will be entitled to a refund of our
earnest money deposit from the affiliated development company. Because the
affiliated development company may be an entity without substantial assets or
operations, our board of directors may require that the affiliated development
company’s obligation to refund our earnest money deposit be guaranteed by
another entity, such as American Realty Capital Properties, LLC, our affiliated
property manager, which provides property management and leasing services to
various American Realty Capital programs, including us, for substantial monthly
fees. As of the time American Realty Capital Properties, LLC or any other
guarantor may be required to perform under any guaranty, we cannot assure you
that such guarantor will have sufficient assets to refund all of our earnest
money deposit in a lump sum payment. In such a case, we would be required
to accept installment payments over time payable out of the revenues of the
guarantor’s operations We cannot assure you that we would be able to collect the
entire amount of our earnest money deposit under such circumstances. See
“Risk Factors — General Risks Related to Investments in Real
Estate.”
Section
1031 Exchange Program
Persons
selling real estate held for investment often seek to reinvest the proceeds of
that sale in another real estate investment in an effort to obtain favorable tax
treatment under Section 1031 of the Internal Revenue Code. An affiliate of
American Realty Capital Advisors, LLC, our advisor, has developed a program (the
“Section 1031 Exchange Program”) to facilitate these transactions, referred to
as like-kind exchanges. For each such transaction (a “Section 1031 Program
Transaction”), an American Realty Capital affiliate will create a single-member
limited liability company (each of which we refer to as a “American Realty
Capital Exchange LLC”). American Realty Capital Exchange LLC will acquire
real estate to be owned in co-tenancy arrangements with persons wishing to
engage in like-kind exchanges (“1031 Participants”). American Realty
Capital Exchange LLC will acquire the subject property and, either concurrently
with or following such acquisition, prepare and market a private placement
memorandum for the sale of co-tenancy interests in that property. When a
1031 Participant wishes to acquire a co-tenancy interest, the American Realty
Capital Exchange LLC will deed (or cause the American Realty Capital Exchange
LLC’s seller to deed) an undivided co-tenancy interest in the subject property
to a newly formed single-member limited liability company and then sell that
entity to the 1031 Participant.
American
Realty Capital anticipates that properties acquired in connection with the
Section 1031 Exchange Program initially will be financed entirely with
debt. The American Realty Capital Exchange LLC acquiring the property may
obtain a first mortgage secured by the property acquired for a portion of the
purchase price. In order to finance the remainder of the purchase price,
the American Realty Capital Exchange LLC will obtain a short-term loan from an
institutional lender (the “Bridge Loan”). Following its acquisition of a
property, a American Realty Capital Exchange LLC will attempt to sell co-tenancy
interests in the property to 1031 Participants in the manner described
above. The American Realty Capital Exchange LLC will use the proceeds of
these sales to pay off the short-term acquisition loan.
When an
American Realty Capital Exchange LLC initially acquires a property, we may enter
into a contract with the American Realty Capital Exchange LLC and/or American
Realty Capital Exchange LLC’s Bridge Loan lender. The contract would
provide that, if the American Realty Capital Exchange LLC cannot sell all of the
co-tenancy interests in that particular property to 1031 Participants, we will
purchase any remaining unsold co-tenancy interests. The purchase price
generally would equal the American Realty Capital Exchange LLC’s cost of those
interests (i.e., the amount of the remaining Bridge Loan). We may execute
an agreement providing for the potential purchase of the unsold co-tenancy
interests from a American Realty Capital Exchange LLC only if our conflicts
committee approves of the transaction as being fair, competitive and
commercially reasonable to us. The price to us may be no greater than the
cost of the co-tenancy interests to the American Realty Capital Exchange LLC
unless the conflicts committee finds substantial justification for such excess
and such excess is reasonable. In addition, a fair market value appraisal
for each property must be obtained from an independent expert selected by our
conflicts committee, and in no event may we purchase co-tenancy interests from
an affiliate at a price that exceeds the current appraised value for the
property interests. Moreover, we may enter into one or more additional
contractual arrangements obligating us to purchase co-tenancy interests in a
particular property directly from the 1031 Participants. In consideration
for such obligations, the American Realty Capital Exchange LLC would pay us a
fee in an amount currently anticipated to range between 1.0% and 1.5% of the
amount of the Bridge Loan. These fees could be characterized by the
Internal Revenue Service as non-qualifying income for purposes of satisfying the
“income tests” required for REIT qualification. If this fee income were,
in fact, treated as non-qualifying, and if the aggregate of such fee income and
any other nonqualifying income in any taxable year ever exceeded 5.0% of our
gross revenues for such year, we could lose our REIT status for that taxable
year and the four ensuing taxable years. Our failure to qualify as a REIT
would adversely affect your return on your investment. While we will
monitor these fees and any other non-qualifying income, we could fail to satisfy
this test.
In the
event that we have any obligation to acquire any interest in a property pursuant
to the Section 1031 Exchange Program, our conflicts committee will be required
to approve each acquisition. Accordingly, American Realty Capital intends
that each American Realty Capital Exchange LLC will purchase only real estate
properties that otherwise meet our investment objectives.
All
purchasers of co-tenancy interests, including us if we purchase co-tenancy
interests, will be required to execute a tenants-in-common agreement with the
other purchasers of co-tenancy interests in that particular property. They
may also be required to execute a property management and leasing agreement with
American Realty Capital, which would provide for the payment of property
management and leasing fees to American Realty Capital. If we are required
to purchase co-tenancy interests pursuant to one or more of these contractual
arrangements, we will be subject to various risks associated with co-tenancy
arrangements that are not otherwise present in real estate investments, such as
the risk that the interests of the 1031 Participants will become adverse to our
interests.
The
Operating Partnership has transferred forty-nine percent (49%) of its ownership
interest in the Federal Express Distribution Facility, located in Snowshoe,
Pennsylvania, and a PNC Bank branch, located in Palm Coast, Florida (when we
acquired this property, it was a National City Bank property; see “Real Property
Investments — National City Bank Properties”), to American Realty
Capital DST I (the “Trust”), a Section 1031 Exchange Program. Realty Capital
Securities, LLC has offered membership interests of up to forty-nine percent
(49%), or $2,567,000, in the Trust to investors in a private offering. The
remaining interests of no less than 51% will be retained by the Operating
Partnership. To date, cash payments of $2,567,000 have been accepted by the
Operating Partnership.
The
Operating Partnership has transferred thirty-five and 2/10th percent (35.2%) of
its ownership interest in a PNC Bank branch location, located in Pompano Beach,
Florida (when we acquired this property, it was a National City Bank property;
see “Real Property Investments — National City Bank Properties”), to
American Realty Capital DST II (the “Trust II”), a Section 1031 Exchange
Program. Realty Capital Securities has offered membership interests of
thirty-five and 2/10th percent
(35.2%), or $493,802, in the Trust II to investors in a private offering. The
remaining interests of no less than 64.8% will be retained by the Operating
Partnership. To date, cash payments of $493,802 have been accepted by the
Operating Partnership.
The
Operating Partnership has transferred forty-nine percent (49%) of its ownership
interest in three CVS properties, located in Smyrna, GA, Chicago, IL and
Visalia, CA to American Realty Capital DST III (the “Trust III”), a Section 1031
Exchange Program. Realty Capital Securities has offered membership interests of
up to forty-nine percent (49%), or $3,050,000, in the Trust III to investors in
a private offering. The remaining interests of no less than fifty-one percent
(51%) will be retained by the Operating Partnership. To date, cash payments of
$3,050,000 have been accepted by the Operating Partnership.
The
Company purchased a Walgreens property in Sealy, TX under a tenant in common
arrangement (“TIC”) with a third party investor. Under the TIC arrangement, the
third party assumed a forty-four percent (44%) interest in the property at the
time of acquisition for an investment of $1,200,000. The remaining interest of
fifty-six percent (56%) was retained by the Company. To date cash payments of
$1,200,000 have been accepted by the Operating Partnership.
The
Operating Partnership shall transfer up to forty-nine percent (49%) of its
ownership interest in six Bridgestone Firestone properties, located in Texas and
New Mexico to American Realty Capital DST IV (the “Trust IV”), a Section 1031
Exchange Program. Realty Capital Securities has offered membership interests of
up to forty-nine percent (49%), or $7,294,000, in the Trust IV to investors in a
private offering. The remaining interests of no less than fifty-one percent
(51%) will be retained by the Operating Partnership. To date, cash payments of
$2,770,000 have been accepted by the Operating Partnership
Disposition
Policies
We intend
to hold each property we acquire for an extended period, generally eight to ten
years. However, circumstances might arise that could result in the early
sale of some properties. We may sell a property before the end of the
expected holding period if we believe the sale of the property would be in the
best interests of our stockholders.
The
determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of relevant factors, including
prevailing economic conditions, specific real estate market circumstances, and
current tenant creditworthiness, with a view to achieving maximum capital
appreciation. We cannot assure you that this objective will be
realized. The selling price of a property that is net leased will be
determined in large part by the amount of rent payable under the lease and the
“sales multiple” applied to that rent. If a tenant has a repurchase option
at a formula price, we may be limited in realizing any appreciation. In
connection with our sales of properties we may lend the purchaser all or a
portion of the purchase price. In these instances, our taxable income may
exceed the cash received in the sale. The terms of payment will be
affected by custom in the area in which the property being sold is located and
the then-prevailing economic conditions.
Investment
Limitations
Our
charter and investment policies place numerous limitations on us with respect to
the manner in which we may invest our funds or issue securities. These
limitations cannot be changed unless our charter is amended, which requires
approval of our stockholders, or we otherwise change our investment
policies. Unless our charter is amended, or we revise our investment
policies, we will not:
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borrow
in excess of 75% of the greater of the aggregate cost (before deducting
depreciation or other non-cash reserves) or the aggregate fair market
value of all assets owned by us as of the date of any borrowing, unless
approved by a majority of our independent directors and disclosed to our
stockholders in our next quarterly report along with the justification for
such excess borrowing;
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borrow
in excess of 300% of our net assets as of the date of the borrowing,
unless the excess is approved by a majority of the independent directors
and disclosed to our stockholders in our quarterly report to stockholders
next following such borrowing along with justification for such
borrowing;
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make
investments in unimproved property or mortgage loans on unimproved
property in excess of 10% of our total
assets;
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acquire
or invest in an asset from our advisor or sponsor, any director or any of
their affiliates without obtaining an appraisal of the fair market value
of the asset from a qualified independent appraiser selected by our
independent directors;
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make
or invest in mortgage loans unless an appraisal is obtained concerning the
underlying property, except for those mortgage loans insured or guaranteed
by a government or government
agency;
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make
or invest in mortgage loans, including construction loans, on any one
property if the aggregate amount of all mortgage loans on such property
would exceed an amount equal to 85% of the appraised value of such
property unless substantial justification exists for exceeding such limit
because of the presence of other underwriting
criteria;
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make
an investment in a property or mortgage loan if the related acquisition
fees and acquisition expenses are unreasonable or exceed 6% of the
purchase price of the property or, in the case of a mortgage loan, 6% of
the funds advanced; provided that the investment may be made if a majority
of our independent directors determines that the transaction is
commercially competitive, fair and reasonable to
us;
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invest
in indebtedness secured by a mortgage on real property which is
subordinate to a lien or other indebtedness of our advisor, our sponsor,
any of our directors or any of our
affiliates;
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invest
in equity securities unless a majority of our directors, including
independent directors, not otherwise interested in the transaction
approves such investment as being fair, competitive and commercially
reasonable;
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invest
in real estate contracts of sale, otherwise known as land sale contracts,
unless the contract is in recordable form and is appropriately recorded in
the chain of title;
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invest
in commodities or commodity futures contracts, except for futures
contracts when used solely for the purpose of hedging in connection with
our ordinary business of investing in real estate assets and
mortgages;
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make
any investment that we believe is inconsistent with our objectives of
qualifying or remaining qualified as a REIT unless and until our board of
directors determines that REIT qualification is not in our best
interests;
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engage
in any short sale;
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engage
in trading, as opposed to investment
activities;
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engage
in underwriting activities or distribute, as an agent, securities issued
by others;
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invest
in foreign currency or bullion;
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issue
equity securities on a deferred payment basis or other similar
arrangement;
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issue
debt securities in the absence of adequate cash flow to cover debt
service;
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issue
equity securities that are assessable after we have received the
consideration for which our board of directors authorized their issuance;
or
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issue
equity securities redeemable solely at the option of the holder, which
restriction has no effect on our share repurchase program or the ability
of our operating partnership to issue redeemable partnership
interests.
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In
addition, our charter includes many other investment limitations in connection
with transactions with affiliated entities or persons, which limitations are
described above under “Conflicts of Interest.” Our charter also includes
restrictions on roll-up transactions, which are described under “Description of
Shares” below.
Change
in Investment Objectives and Limitations
Our
charter requires that our independent directors review our investment policies
at least annually to determine that the policies we follow are in the best
interest of our stockholders. Each determination and the basis therefor
shall be set forth in the minutes of the meetings of our board of
directors. The methods of implementing our investment policies also may
vary as new real estate development trends emerge and new investment techniques
are developed. The methods of implementing our investment objectives and
policies, except as otherwise provided in the organizational documents, may be
altered by a majority of our directors, without the approval of our
stockholders.
Investment
Company Act Considerations
We intend
to conduct our operations so that the Company and its subsidiaries are each
exempt from registration as an investment company under the Investment Company
Act. Under the Investment Company Act, in relevant part, a company is an
“investment company” if:
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pursuant
to Section 3(a)(1)(A), it is, or holds itself out as being, engaged
primarily, or proposes to engage primarily, in the business of investing,
reinvesting or trading in securities;
and
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pursuant
to Section 3(a)(1)(C), it is engaged, or proposes to engage, in the
business of investing, reinvesting, owning, holding or trading in
securities and owns or proposed to acquire “investment securities” having
a value exceeding 40% of the value of its total assets on an
unconsolidated basis. “Investment securities” excludes U.S.
Government securities and securities of majority-owned subsidiaries that
are not themselves investment companies and are not relying on the
exception from the definition of investment company under Section 3(c)(1)
or Section 3(c)(7) of the Investment Company
Act.
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We intend
to acquire real estate and real-estate related assets directly, for example, by
acquiring fee interests in real property, or by purchasing interests, including
controlling interests, in REITs or other “real estate operating companies,” such
as real estate management companies and real estate development companies, that
own real property. We also may acquire real estate assets through
investments in joint venture entities, including joint venture entities in which
we may not own a controlling interest. We anticipate that our assets
generally will be held in wholly or majority-owned subsidiaries of the Company,
each formed to hold a particular asset.
We intend
to conduct our operations so that the Company and most, if not all, of its
wholly and majority-owned subsidiaries will comply with the 40% test. We
will continuously monitor our holdings on an ongoing basis to determine the
compliance of the Company and each wholly and majority-owned subsidiary with
this test. We expect that most, if not all, of the Company’s wholly owned
and majority-owned subsidiaries will not be relying on exemptions under either
Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
Consequently, interests in these subsidiaries (which are expected to constitute
most, if not all, of our assets) generally will not constitute “investment
securities.” Accordingly, we believe that the Company and most, if not
all, of its wholly and majority-owned subsidiaries will not be considered
investment companies under Section 3(a)(1)(C) of the Investment Company
Act.
In
addition, we believe that neither the Company nor any of its wholly and
majority-owned subsidiaries will be considered investment companies under
Section 3(a)(1)(A) of the Investment Company Act because they will not engage
primarily or hold themselves out as being engaged primarily in the business of
investing, reinvesting or trading in securities. Rather, the Company and
its subsidiaries will be primarily engaged in non-investment company businesses
related to real estate. Consequently, the Company and its subsidiaries
expect to be able to conduct their respective operations such that none of them
will be required to register as an investment company under the Investment
Company Act.
The
determination of whether an entity is a majority-owned subsidiary of our Company
is made by us. The Investment Company Act defines a majority-owned
subsidiary of a person as a company 50% or more of the outstanding voting
securities of which are owned by such person, or by another company which is a
majority-owned subsidiary of such person. The Investment Company Act
further defines voting securities as any security presently entitling the owner
or holder thereof to vote for the election of directors of a company. We
treat entities in which we own at least a majority of the outstanding voting
securities as majority-owned subsidiaries for the purposes of the 40%
test. We have not requested that the SEC staff approve our treatment of
any entity as a majority-owned subsidiary and the SEC staff has not done
so. If the SEC staff were to disagree with our treatment of one or more
subsidiary entries as majority-owned subsidiaries, we would need to adjust our
strategy and our assets in order to continue to comply with the 40% test.
Any such adjustment in our strategy could have a material adverse effect on
us.
We intend
to conduct our operations so that neither we nor any of our wholly or
majority-owned subsidiaries fall within the definition of “investment company”
under the Investment Company Act. If the Company or any of its wholly or
majority-owned subsidiaries inadvertently falls within one of the definitions of
“investment company,” we intend to rely on the exclusion provided by Section
3(c)(5)(C) of the Investment Company Act, which is available for entities
primarily engaged in the business of “purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate.” In addition to
prohibiting the issuance of certain types of securities, this exclusion
generally requires that at least 55% of an entity’s assets must be comprised of
mortgages and other liens on and interests in real estate, also known as
“qualifying assets,” and at least 80% of the entity’s assets must be comprised
of qualifying assets and a broader category of assets that we refer to as
“real-estate related assets” under the Investment Company Act.
Additionally, no more than 20% of the entity’s assets may be comprised of
miscellaneous assets.
We will
classify our assets for purposes of the Investment Company Act, including our
3(c)(5)(C) exclusion, in large measure upon no-action positions taken by the SEC
staff in the past. These no-action positions were issued in accordance
with factual situations that may be substantially different from the factual
situations we may face, and a number of these no-action positions were issued
more than ten years ago. No assurance can be given that the SEC staff will
concur with our classification of our assets. In addition, the SEC staff
may, in the future, issue further guidance that may require us to re-classify
our assets for purposes of the Investment Company Act. If we are required
to re-classify our assets, we may no longer be in compliance with the exclusion
from the definition of an investment company provided by Section 3(c)(5)(C) of
the Investment Company Act.
For
purposes of determining whether we satisfy the 55%/80% tests, we will classify
the assets in which we invest as follows:
|
·
|
Real Property.
Based on the no-action letters issued by the SEC staff, we will classify
our fee interests in real properties as qualifying assets. In
addition, based on no-action letters issued by the SEC staff, we will
treat our investments in joint ventures, which in turn invest in
qualifying assets such as real property, as qualifying assets only if we
have the right to approve major decisions affecting the joint venture;
otherwise, such investments will be classified as real-estate-related
assets. We expect that no less than 55% of our assets will consist
of investments in real property, including any joint ventures that we
control.
|
|
·
|
Securities. We
intend to treat as real estate-related assets debt and equity securities
of both non-majority owned publicly traded and private companies primarily
engaged in real estate businesses, including REITs and other real estate
operating companies, and securities issued by pass-through entities of
which substantially all of the assets consist of qualifying assets or real
estate-related assets.
|
|
·
|
Loans. Based on
the no-action letters issued by the SEC staff, we will classify our
investments in various types of whole loans as qualifying assets, as long
as the loans are “fully secured” by an interest in real estate at the time
we originate or acquire the loan. However, we will consider loans
with loan-to-value ratios in excess of 100% to be real-estate related
assets. We will treat our mezzanine loan investments as qualifying
assets so long as they are structured as “Tier 1” mezzanine loans in
accordance with the guidance published by the SEC staff in a no-action
letter that discusses the classifications of Tier 1 mezzanine loans
under Section 3(c)(5)(C) of the Investment Company
Act.
|
We will
classify our investments in construction loans as qualifying assets, as long as
the loans are “fully secured” by an interest in real estate at the time we
originate or acquire the loan. With respect to construction loans that are
funded over time, we will consider the outstanding balance (i.e., the amount of
the loan actually drawn) as a qualifying asset. The SEC staff has not
issued no-action letters specifically addressing construction loans. If
the SEC staff takes a position in the future that is contrary to our
classification, we will modify our classification accordingly.
Consistent
with no-action positions taken by the SEC staff, we will consider any
participation in a whole mortgage loan, including B-Notes, to be a qualifying
real estate asset only if: (1) we have a participation interest in a
mortgage loan that is fully secured by real property; (2) we have the right
to receive our proportionate share of the interest and the principal payments
made on the loan by the borrower, and our returns on the loan are based on such
payments; (3) we invest only after performing the same type of due
diligence and credit underwriting procedures that we would perform if we were
underwriting the underlying mortgage loan; (4) we have approval rights in
connection with any material decisions pertaining to the administration and
servicing of the loan and with respect to any material modification to the loan
agreements; and (5) if the loan becomes non-performing, we have effective
control over the remedies relating to the enforcement of the mortgage loan,
including ultimate control of the foreclosure process, by having the right
to: (a) appoint the special servicer to manage the resolution of the
loan; (b) advise, direct or approve the actions of the special servicer; (c)
terminate the special servicer at any time with or without cause; (d) cure the
default so that the mortgage loan is no longer non-performing; and (e) purchase
the senior loan at par plus accrued interest, thereby acquiring the entire
mortgage loan.
We will
base our treatment of any other investments as qualifying assets and real-estate
related assets on the characteristics of the underlying collateral and the
particular type of loan (including whether we have foreclosure rights with
respect to those securities or loans that have underlying real estate
collateral) and we will make these determinations in a manner consistent with
guidance issued by the SEC staff.
Qualification
for exemption from registration under the Investment Company Act will limit our
ability to make certain investments. For example, these restrictions may
limit the ability of the Company and its subsidiaries to invest directly in
mortgage-related securities that represent less than the entire ownership in a
pool of mortgage loans, debt and equity tranches of securitizations and certain
asset-backed securities and real estate companies or in assets not related to
real estate. Although we intend to monitor our portfolio, there can be no
assurance that we will be able to maintain this exemption from registration for
our Company or each of our subsidiaries.
A change
in the value of any of our assets could negatively affect our ability to
maintain our exemption from regulation under the Investment Company Act.
To maintain compliance with the Section 3(c)(5)(C) exclusion, we may be unable
to sell assets we would otherwise want to sell and may need to sell assets we
would otherwise wish to retain. In addition, we may have to acquire
additional assets that we might not otherwise have acquired or may have to
forego opportunities to acquire assets that we would otherwise want to acquire
and would be important to our investment strategy.
To the
extent that the SEC staff provides more specific guidance regarding any of the
matters bearing upon the definition of investment company and the exceptions to
that definition, we may be required to adjust our investment strategy
accordingly. Additional guidance from the SEC staff could provide
additional flexibility to us, or it could further inhibit our ability to pursue
the investment strategy we have chosen.
If we are
required to register as an investment company under the Investment Company Act,
we would become subject to substantial regulation with respect to our capital
structure (including our ability to use borrowings), management, operations,
transactions with affiliated persons (as defined in the Investment Company Act),
and portfolio composition, including restrictions with respect to
diversification and industry concentration and other matters. Compliance
with the Investment Company Act would, accordingly, limit our ability to make
certain investments and require us to significantly restructure our business
plan.
Real
Estate Investments Summary
The REIT
has acquired the following real estate investments through July 27,
2010:
|
·
|
Distribution and Warehouse
Facilities
|
|
·
|
a
FedEx Cross-Dock facility in Snowshoe, PA; a FedEx Freight Facility in
Houston, TX; and a FedEx Freight West, Inc. distribution facility in West
Sacramento, CA;
|
|
·
|
a
leasehold interest in a build-to-suit Home Depot Distribution Facility in
Topeka, KS;
|
|
·
|
2
Fresenius Medical Care Distribution Facilities located in Apple Valley, CA
and Shasta Lake, CA, respectively;
|
|
·
|
1
build-to-suit warehouse facility for Reckitt Benckiser located in Tooele,
UT, near Salt Lake City;
|
|
·
|
15
First Niagara (formerly Harleysville National Bank and Trust Company) bank
branch properties in various Pennsylvania
locations;
|
|
·
|
18
Rockland Trust Company bank branch properties in various Massachusetts
locations;
|
|
·
|
52
PNC Bank including 2 formerly National City Bank branches in Florida,
Pennsylvania, New Jersey and Ohio;
|
|
·
|
6
Rite Aid properties in various locations in Pennsylvania and
Ohio;
|
|
·
|
3
Walgreens locations located in Sealy, TX, Byram MS and LeRoy,
NY;
|
|
·
|
25
newly constructed retail stores from CVS Caremark located in 16 states —
Illinois, South Carolina, Texas, Georgia, Michigan, New York, Arizona,
North Carolina, California, Alabama, Florida, Indiana, Maine, Minnesota,
Missouri, and Nevada;
|
|
·
|
6
recently constructed Bridgestone retail stores in various locations in
Oklahoma and Florida;
|
|
·
|
4
Advanced Auto locations located in Michigan, Alabama and
Mississippi;
|
|
·
|
12
recently constructed Bridgestone Firestone auto-centers located in
Albuquerque, NM, Rockwell, TX, Weatherford, TX, League City, TX, Crowley,
TX, Allen, TX, Pearland, TX, Austin, TX, Grand Junction, CO, Benton, AR,
Wichita, KS and Baton Rouge, LA;
|
|
·
|
11
restaurants from Jack In the Box, Inc. located in Desloge, MO; The Dalles,
OR; Vancouver, WA, Corpus Christi, TX, Houston, TX, South Houston,
TX; two properties in Victoria, TX; Beaumont, TX Ferris, TX and
Forney, TX.
|
|
·
|
3
built-to suit, free-standing restaurant for International House of
Pancakes located in Hilton Head, SC, Buford, GA and Cincinnati,
OH;
|
|
·
|
4
build-to-suit properties from Jared the Galleria of Jewelry located in
Amherst, NY, Lake Grove, NY and Watchung, NJ and Plymouth, Massachusetts;
and
|
|
·
|
1
Super Stop & Shop supermarket located in Nanuet,
NY.
|
|
·
|
1
Build to suit free standing retail property for Tractor Supply located in
DuBois, PA
|
|
·
|
1
Build to suit free standing retail property for Dollar General located in
Jacksonville, FL
|
The
amount of the Year 1 yield based upon the contract purchase price of the
acquired properties as compared to the Year 1 total rent is approximately 8.38%,
which excludes contractual rent increases occurring in future years. The amounts
in the following table are as of June 30, 2010 except for Tractor supply and
Dollar general which are as of the acquisition date . (dollars in
thousands):
|
|
Purchase
Price(1)
|
|
|
Current
Mortgage
Debt
|
|
|
Effective
Interest
Rate
|
|
|
Portfolio-
Level
Leverage
|
|
|
Rent
|
|
|
Base Rent
Increase
(Year 2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
1
|
|
|
Year 2
|
|
|
|
|
Federal
Express Distribution Center (PA)
|
|
$ |
10,208 |
|
|
$ |
6,965 |
|
|
|
6.29 |
% |
|
|
68.2 |
% |
|
$ |
703 |
|
|
$ |
703 |
|
|
3.78%
and 3.65% in years 6
and
11, respectively
|
|
Harleysville
National Bank Portfolio
|
|
|
41,676 |
|
|
|
31,000 |
|
|
|
6.59 |
% |
|
|
74.4 |
% |
|
|
3,004 |
|
|
|
3,064 |
|
|
—
|
|
Rockland
Trust Company Portfolio
|
|
|
33,117 |
|
|
|
23,414 |
|
|
|
4.92 |
% |
|
|
70.7 |
% |
|
|
2,306 |
|
|
|
2,340 |
|
|
1.5%
annually
|
|
PNC
Bank (formerly National City Bank)
|
|
|
6,853 |
|
|
|
4,375 |
|
|
|
4.58 |
% |
|
|
63.8 |
% |
|
|
466 |
|
|
|
466 |
|
|
10%
after 5 years
|
|
Rite
Aid Portfolio
|
|
|
18,839 |
|
|
|
12,808 |
|
|
|
6.97 |
% |
|
|
68.0 |
% |
|
|
1,404 |
|
|
|
1,404 |
|
|
—
|
|
PNC
Bank Portfolio
|
|
|
44,813 |
|
|
|
32,704 |
|
|
|
5.25 |
% |
|
|
73.0 |
% |
|
|
2,960 |
|
|
|
2,960 |
|
|
10%
after 5 years
|
|
FedEx
Freight Facility (TX)
|
|
|
31,692 |
|
|
|
16,184 |
|
|
|
6.033 |
% |
|
|
51.1 |
% |
|
|
2,580 |
|
|
|
2,580 |
|
|
1%
increase in years 5 and 9
|
|
Walgreens
Location
|
|
|
3,818 |
|
|
|
1,550 |
|
|
|
6.64 |
% |
|
|
40.6 |
% |
|
|
310 |
|
|
|
310 |
|
|
—
|
|
CVS
Pharmacy Portfolio I
|
|
|
40,649 |
|
|
|
23,587 |
|
|
|
6.88 |
% |
|
|
58.0 |
% |
|
|
3,387 |
|
|
|
3,387 |
|
|
5%
increase every 5 years
|
|
CVS
Pharmacy Portfolio II
|
|
|
59,788 |
|
|
|
32,900 |
|
|
|
6.64 |
% |
|
|
55.0 |
% |
|
|
4,984 |
|
|
|
4,984 |
|
|
5%
increase every 5 years
|
|
Home
Depot Distribution Facility
|
|
|
23,532 |
|
|
|
12,150 |
|
|
|
6.25 |
% |
|
|
51,6 |
% |
|
|
1,806 |
|
|
|
1,839 |
|
|
2%
annually
|
|
Bridgestone
Firestone Portfolio
|
|
|
15,041 |
|
|
|
3,832 |
|
|
|
6,61 |
% |
|
|
25.48 |
% |
|
|
1,270 |
|
|
|
1,270 |
|
|
6.25%
every 5 years
|
|
Advanced
Auto Location
|
|
|
1,730 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
160 |
|
|
|
160 |
|
|
—
|
|
Fresenius
Portfolio
|
|
|
12,462 |
|
|
|
6,068 |
|
|
|
6.72 |
% |
|
|
48.7 |
% |
|
|
1,023 |
|
|
|
1,023 |
|
|
Approximately
10% in years 2 and 7
|
|
Reckitt
Benckiser
|
|
|
31,735 |
|
|
|
14,962 |
|
|
|
6.23 |
% |
|
|
47.2 |
% |
|
|
2,279 |
|
|
|
2,434 |
|
|
2.0%
annually
|
|
Jack
in the Box Portfolio
|
|
|
7,720 |
|
|
|
4,384 |
|
|
|
6.45 |
% |
|
|
56.8 |
% |
|
|
639 |
|
|
|
639 |
|
|
—
|
|
Jack
in the Box-Houston
|
|
|
2,290 |
|
|
|
971 |
|
|
|
6.26 |
% |
|
|
42.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
BSFS
II Portfolio
|
|
|
26,414 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,150 |
|
|
|
2,150 |
|
|
6.25%
every 5 years
|
|
Fed
Ex Sacramento
|
|
|
34,171 |
|
|
|
15,000 |
|
|
|
5..57 |
% |
|
|
43.9 |
% |
|
|
2,761 |
|
|
|
2,880 |
|
|
Increases
every 30 months based
on
CPI, min 5% / max 10%
|
|
Jared
Jewelry
|
|
|
5,457 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
580 |
|
|
|
580 |
|
|
10%
increase every 5 years
|
|
Walgreens
II – Byram
|
|
|
5,684 |
|
|
|
3,000 |
|
|
|
5.58 |
% |
|
|
52.78 |
% |
|
|
453 |
|
|
|
453 |
|
|
—
|
|
IHOP
|
|
|
2,445 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
192 |
|
|
|
192 |
|
|
5%
increase every 5 years
|
|
Advance
Auto II
|
|
|
3,674 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
308 |
|
|
|
308 |
|
|
—
|
|
Super
Stop & Shop
|
|
|
23,795 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,784 |
|
|
|
1,784 |
|
|
Increases
approx 7.5% every 5 yrs
|
|
IHOP
II
|
|
|
2,300 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
180 |
|
|
|
180 |
|
|
10%
increase every 5 years
|
|
IHOP
III
|
|
|
3,319 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
239 |
|
|
|
261 |
|
|
10%
increase every 5 years
|
|
Jared
Jewelry II
|
|
|
1,635 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
174 |
|
|
|
182 |
|
|
10%
increase every 5 years
|
|
Jack
in the box II
|
|
|
11,396 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
892 |
|
|
|
892 |
|
|
Increase
every five years based
on
CPI with max 10%
|
|
Walgreens
III
|
|
|
5,062 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
385 |
|
|
|
385 |
|
|
—
|
|
Tractor
Supply
|
|
|
2,846 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
225 |
|
|
|
225 |
|
|
10%
increase every 5 years
|
|
Dollar
General
|
|
|
1,228 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
118 |
|
|
|
118 |
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Portfolio
|
|
$ |
515,389 |
|
|
|
245,854 |
|
|
|
6.11 |
% |
|
|
48.1 |
% |
|
|
39,722 |
|
|
|
40,153 |
|
|
|
|
Investment
Grade Tenants (based
on Rent – S&P BBB- or better)
|
|
|
|
|
|
|
|
|
|
|
86 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Remaining
Lease Term (years) (4)
|
|
|
|
|
|
|
|
|
|
|
15.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Base
purchase for acquisitions prior to January 1, 2009 include capitalized
acquisition related costs. Effective January 1, 2009, acquisition related
costs are required to be expensed in accordance with
GAAP.
|
(2)
|
Interest
rate includes the effect of in-place
hedges.
|
(3)
|
Increase
does not take into account lease escalations that commence in future years
or adjustments based on the Consumer Price
Index.
|
(4)
|
As
of June 30, 2010 or acquisition date for July 2010
acquisitions — Primary lease term only (excluding renewal option
periods).
|
(5)
|
Weighted
average rate as of June 30, 2010
|
(6)
|
The
loan has a four-year term, with the first three years considered the
initial term at an interest rate of 6.25%, and a one year extension at an
interest rate of 6.50%.
|
Year
|
|
Expiring
Revenues
|
|
|
Expiring
Leases(1)
|
|
|
Square
Feet
|
|
|
% of
Gross Rev
|
|
2009
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2010
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2011
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2012
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2013
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2014
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2015
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2016
|
|
|
242 |
|
|
|
2 |
|
|
|
21,476 |
|
|
|
0.6
|
% |
2017
|
|
|
179 |
|
|
|
1 |
|
|
|
12,613 |
|
|
|
0.4
|
% |
2018
|
|
|
4,896 |
|
|
|
59 |
|
|
|
384,201 |
|
|
|
11.5
|
% |
2019
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
5,317 |
|
|
|
62 |
|
|
|
418,290 |
|
|
|
12.5
|
% |
(1)
|
The 62 leases listed above are
with the following tenants: FedEx, Rockland Trust Company, PNC Bank and
Rite Aid.
|
Real
Property Investments
FedEx
Property – Snowshoe, PA(1)
The REIT
acquired a FedEx Cross-Dock facility in Snowshoe, Pennsylvania (the “FedEx
Property”) as its initial investment on March 5, 2008. On February 25,
2008, the REIT’s entire Board of Directors (with the two inside directors
abstaining because the acquisition of the FedEx Property is an affiliated
transaction) approved the acquisition of the FedEx Property, which acquisition
closed on March 5, 2008.
The REIT
acquired the FedEx Property at sellers’ cost, which does not exceed the fair
market value of the FedEx Property as determined by an appraisal of a qualified
independent appraiser. The purchase price for the FedEx Property is
approximately $10.0 million. The FedEx Property is subject to
approximately $7.0 million of existing debt. The REIT funded the balance
of the purchase price by issuing 342,502 of shares of common stock to the
sellers. Closing costs and fees aggregated approximately
$215,000.
Our
operating partnership, American Realty Capital Operating Partnership, L.P.,
entered into a purchase agreement to purchase the FedEx Property subject to
customary due diligence and other conditions, as described above. The
sellers of the FedEx Property are two unaffiliated parties, who own
approximately 70% of indirect interest in the FedEx Property, and our sponsors,
Nicholas S. Schorsch and William M. Kahane, who own approximately 30% of
indirect interest in the FedEx Property. The FedEx Property is a shipping
and distribution facility located at 401 E. Sycamore, Snowshoe, PA. Built
in 2004, the FedEx Property has 55,440 square feet of warehouse space. The
current sole tenant is FedEx and will remain the sole tenant on a double-net
lease basis.
_____________
(1)
|
Our
operating partnership has transferred forty-nine percent (49%) interest in
the FedEx Property to American Realty Capital DST, I, a Section 1031
Exchange Program. See “Section 1031 Exchange
Program.”
|
|
|
|
|
|
|
|
Compensation to
Advisor and Affiliates(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
401
E. Sycamore
|
|
3/5/2008
|
|
$ |
10,207,674 |
|
|
$ |
170125 |
|
(1)
|
Sellers
are our sponsors, Nicholas S. Schorsch and William M. Kahane, and two
unaffiliated parties.
|
(2)
|
Purchase
price includes all closing costs inclusive of the acquisition fee, which
equals 1% of the contract purchase
price.
|
(3)
|
Amounts
include acquisition and finance coordination fees paid to our advisor for
acquisition and finance coordination services rendered in connection with
the property acquisition.
|
The
property acquisition is subject to a double-net lease, pursuant to which the
landlord is responsible for maintaining the property’s roof and structure, and
the tenant is required to pay all other expenses associated with the property in
addition to base rent.
The table
below provides leasing information for the tenant at the property:
|
|
|
|
|
|
|
|
|
|
|
Base Rent
per Square
Foot
|
|
|
|
|
|
|
|
401
E. Sycamore
|
|
|
1 |
|
FedEx
Freight
East
Inc.
|
|
13-year
lease
2
five-year
extension
periods
|
|
$ |
702,828 |
|
|
$ |
12.68 |
|
|
|
55,440 |
|
|
|
8.4 |
|
(1)
|
Remaining
lease term as of July 27, 2010.
|
The
following table outlines the loan terms on the existing debt financing assumed
in connection with acquisition of the FedEx Property.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401
E. Sycamore
|
|
$ |
6,965,000 |
|
Interest
only
|
|
|
6.29 |
% |
9/1/2037
|
FedEx
Corporation, together with its subsidiaries, provides transportation,
e-commerce, and business services. It operates in four segments:
FedEx Express, FedEx Ground, FedEx Freight, and FedEx Kinko’s. The FedEx
Express segment offers various shipping services for the delivery of packages
and freight. This segment also provides international trade services
specializing in customs brokerage and global cargo distribution; international
trade advisory services; and publishes customs duty and tax information, as well
as provides Global Trade Data, an information tool that allows customers to
track and manage imports. The FedEx Ground segment provides business and
residential money-back-guaranteed ground package delivery services. The
FedEx Freight segment offers regional next-day and second-day, and interregional
less-than-truckload (LTL) freight services, as well as long-haul LTL freight
services. The FedEx Kinko’s segment provides document services, such as
printing, copying, and binding services; and business services, such as
high-speed Internet access and computer rental, videoconferencing, signs and
graphics production, and direct mail services. This segment also offers
retail products, such as specialty papers, greeting cards, printer cartridges,
stationery, and office supplies, as well as provides Web-based services.
The Company also offers supply chain solutions, including critical inventory
logistics, transportation management, fulfillment, and fleet services.
FedEx Corporation, formerly known as FDX Corporation, was founded in 1971 and is
headquartered in Memphis, Tennessee. FedEx Corporation stock is listed on
the New York Stock Exchange, and FedEx has a credit rating of BBB.
Because
the FedEx Property is 100% leased to a single tenant on a long-term basis under
a net lease, which transfers substantially all of the operating costs to the
tenant, we believe that the financial condition and results of operations of the
tenant’s guarantor and affiliate, FedEx Corporation, are more relevant to
investors than the financial statements of the individual property acquired in
order to enable investors to evaluate the lessee’s credit-worthiness.
Additionally, because the properties are subject to a net lease, historical
property financial statements provide limited information other than rental
income, which is disclosed above. Therefore, we have not provided audited
financial statements of the properties acquired.
FedEx
Freight Facility — Houston, TX
On July
8, 2009, the REIT acquired a newly constructed freight facility net leased to
FedEx Freight and guaranteed by FedEx Corporation (the “FedEx Facility”).
The REIT’s Board of Trustees approved the acquisition of the FedEx Facility in
May 2009.
The
purchase price for the FedEx Facility was approximately $31.6 million. The
purchase price is comprised of a combination of short-term bridge financing and
proceeds from the sale of common shares. The Company entered into a
one-year bridge credit facility with Amegy Bank of Texas and received proceeds
of approximately $15.9 million. The credit facility bears interest at an
annual rate of equal to 5.75%. The remaining portion of the purchase price
was funded using available funds under the Company’s related party bridge
facilities and equity capital. The FedEx Facility is a freight facility of
152,640 square feet located in Houston, TX. The current sole tenant of the
property is FedEx Freight, a subsidiary of FedEx Corporation (“FedEx”) and will
remain the sole tenant on a double-net lease basis.
|
|
|
|
|
|
|
Approximate
Compensation
to
Advisor
and Affiliates
|
|
9010
Jackrabbit Road
|
|
Houston,
TX
|
|
$ |
31,610,000 |
|
|
$ |
468,000 |
|
The Fed
Ex Facility is net leased to FedEx, pursuant to which FedEx is required to pay
substantially all operating expenses (other than the costs to maintain and
repair the roof and structure of the building) and capital expenditures in
addition to base rent, simultaneously with the acquisition of the
properties. The primary lease term is fifteen years, having commenced on
October 16, 2008, and provides for up to two successive five-year
extensions. Annual rent is approximately $2.6 million for the first year
of the initial lease term, and annual rent will increase by 8% every five
years.
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
Lease
Term
(Years)(1)
|
|
9010
Jackrabbit Road
|
|
Houston,
TX
|
|
|
152,640 |
|
|
$ |
2,600,000 |
|
|
$ |
17.03 |
|
|
|
13.3 |
|
(1)
|
Lease
expires on October 16, 2023, remaining lease term as of July 27,
2010.
|
Federal
Express - Sacramento, CA
On April
30, 2010, we acquired one build-to-suit, freestanding, fee-simple distribution
facility located in West Sacramento, California (the “FedEx Property”) for FedEx
Freight West, Inc. (“FedEx Freight West”) for $34,211,889, inclusive of all
closing costs and fees. The FedEx Property contains 118,796 square feet of
gross leasable area. FedEx Freight West is a wholly owned subsidiary of
the FedEx Corporation (NYSE: “FDX”), the lease guarantor.
The
original lease term at commencement was 15 years with 10.9 years currently
remaining as of July 16, 2010. The lease contains rental escalations
equivalent to the cumulative increase in the Consumer Price Index over the
previous 20 months, with a minimum increase of 5% and a maximum increase of
10%. The lease provides for 3 renewal options of 5 years each followed by
one renewal option of 4 years. The lease is double-net with the landlord
responsible for roof and structure. The average annual base rent for the
initial term is approximately $3,087,000.
We
financed the acquisition of the FedEx Property with a 5-year first mortgage loan
from Ladder Capital Finance, LLC, proceeds from the sale of our common stock,
and a $3,000,000 investment from an unrelated third party. The loan from
Ladder Capital Finance, LLC will be secured by a mortgage on the FedEx
Property. The following table outlines the terms of the debt financing
incurred in connection with the acquisition of the FedEx Property.
Mortgage
Debt Amount
|
|
Rate
|
|
Maturity
Date
|
$15,000,000
|
|
|
5.49 |
% |
5
years
|
|
|
|
|
|
|
FedEx
Freight West provides regional less-than-truckload transportation services in
the western United States. The company transports general commodities and
also provides online shipping transactions services. FedEx Freight West
was founded in 1966 as Viking Delivery Service, Inc. and changed its name
to Viking Freight System, Inc. in 1974 and then to Viking Freight, Inc. in
1966. It further changed its name to FedEx Freight West, Inc. in
2002. The company is based in San Jose, California. As of February
12, 2001, FedEx Freight West was acquired by FedEx Corporation.
FedEx
Corporation currently files its financial statements in reports filed with the
Securities and Exchange Commission, and the following summary financial data
regarding FedEx Corporation are taken from the company’s annual reports
for the periods indicated
Consolidated
Statements of Operations |
|
For
the Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
34,734,000 |
|
|
$ |
35,497,000 |
|
|
$ |
37,953,000 |
|
|
$ |
35,214,000 |
|
Operating
Income
|
|
|
1,998,000 |
|
|
|
747,000 |
|
|
|
2,075,000 |
|
|
|
3,276,000 |
|
Net
Income
|
|
|
1,184,000 |
|
|
|
98,000 |
|
|
|
1,125,000 |
|
|
|
2,016,000 |
|
Consolidated
Balance Sheets |
|
As
of the Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
24,902,000 |
|
|
$ |
24,244,000 |
|
|
$ |
25,633,000 |
|
|
$ |
24,000,000 |
|
Long-term
Debt
|
|
|
1,668,000 |
|
|
|
1,930,000 |
|
|
|
1,506,000 |
|
|
|
2,007,000 |
|
Stockholders’
Equity
|
|
|
13,811,000 |
|
|
|
13,626,000 |
|
|
|
14,526,000 |
|
|
|
12,656,000 |
|
For more
detailed financial information regarding FedEx Corporation, please refer to its
financial statements, which are publicly available with the Securities and
Exchange Commission at http://www.sec.gov.
First
Niagara (formerly Harleysville) Properties
The REIT
acquired 15 Harleysville National Bank and Trust Company, which are now owned by
First Niagara Bank (“First Niagara National Bank”) branch properties in various
Pennsylvania locations (the “First Niagara Properties”) on March 12, 2008.
On February 25, 2008, the REIT’s entire Board of Directors (with the two inside
directors abstaining because the acquisition is an affiliated transaction)
approved the acquisition of the First Niagara Properties.
The REIT
acquired the First Niagara Properties at seller’s cost, which does not exceed
the fair market value of the First Niagara Properties as determined by an
appraisal of a qualified independent appraiser. The purchase price for the
First Niagara Properties is approximately $41.0 million, which is subject to
approximately $31.0 million of existing debt. The remainder of the
purchase price was paid with proceeds from the offering and revolving equity
investments.(4) The
seller of the First Niagara Properties is one of the REIT’s sponsors, Nicholas
S. Schorsch. The First Niagara Properties are commercial bank branch
locations throughout Pennsylvania with an aggregate of 178,000 square
feet. The current sole tenant of the properties is First Niagara National
Bank and will remain the sole tenant on a triple-net lease basis.
First
Niagara Property Location
|
|
|
|
Approximate
Purchase Price(1)
(2)
|
|
Approximate
Compensation to
Advisor and
Affiliates(3)
|
Harleysville,
PA
|
|
3/12/2008
|
|
$ |
13,578,000 |
|
TOTAL
FOR ALL PROPERTIES
=
$720,000
(Acquisition
Fee + Finance
Coordination
Fee)
|
Lansdale,
PA
|
|
3/12/2008
|
|
|
1,828,000 |
|
Lansdale,
PA
|
|
3/12/2008
|
|
|
1,618,000 |
|
Lansford,
PA
|
|
3/12/2008
|
|
|
2,034,000 |
|
Lehighton,
PA
|
|
3/12/2008
|
|
|
999,000 |
|
|
Limerick,
PA
|
|
3/12/2008
|
|
|
1,694,000 |
|
|
Palmerton,
PA
|
|
3/12/2008
|
|
|
3,319,000 |
|
|
Sellersville,
PA
|
|
3/12/2008
|
|
|
1,162,000 |
|
|
Skippack,
PA
|
|
3/12/2008
|
|
|
1,527,000 |
|
|
Slatington,
PA
|
|
3/12/2008
|
|
|
1,194,000 |
|
|
Springhouse,
PA
|
|
3/12/2008
|
|
|
4,071,000 |
|
|
Summit
Hill, PA
|
|
3/12/2008
|
|
|
1,784,000 |
|
|
Walnutport,
PA
|
|
3/12/2008
|
|
|
1,699,000 |
|
|
Wyomissing,
PA
|
|
3/12/2008
|
|
|
1,552,000 |
|
|
Slatington,
PA
|
|
3/12/2008
|
|
|
3,617,000 |
|
|
Total
|
|
|
|
$ |
41,676,000 |
|
|
(1)
|
Seller
is our sponsor, Nicholas S.
Schorsch.
|
(2)
|
Purchase
price includes all closing costs inclusive of the acquisition fee, which
equals 1% of the contract purchase
price.
|
(3)
|
Amounts
include acquisition and finance coordination fees paid to our advisor for
acquisition and finance coordination services rendered in connection with
property acquisition.
|
(4)
|
The
proceeds from the offering totaled approximately $2,046,000 and the
revolving equity investments totaled $3,954,000 and
$4,000,000.
|
Each
property acquired is subject to a triple-net lease, pursuant to which the tenant
is required to pay substantially all operating expenses and capital expenditures
in addition to base rent.
First Niagara
Property Location
|
|
|
|
|
|
|
|
|
% of Total
Sq. Ft. Leased
|
|
Harleysville,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
80,275 |
|
|
|
100 |
% |
Lansdale,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
3,488 |
|
|
|
100 |
% |
Lansdale,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
3,690 |
|
|
|
100 |
% |
Lansford,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
7,285 |
|
|
|
100 |
% |
Lehighton,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
2,868 |
|
|
|
100 |
% |
Limerick,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
5,000 |
|
|
|
100 |
% |
Palmerton,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
11,602 |
|
|
|
100 |
% |
Sellersville,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
3,364 |
|
|
|
100 |
% |
Skippack,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
4,500 |
|
|
|
100 |
% |
Slatington,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
7,320 |
|
|
|
100 |
% |
Slatington,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
19,872 |
|
|
|
100 |
% |
Spring
House, PA
|
|
First
Niagara Bank
|
|
same
|
|
|
12,240 |
|
|
|
100 |
% |
Summit
Hill, PA
|
|
First
Niagara Bank
|
|
same
|
|
|
5,800 |
|
|
|
100 |
% |
Walnutport,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
5,490 |
|
|
|
100 |
% |
Wyomissing,
PA
|
|
First
Niagara Bank
|
|
same
|
|
|
4,980 |
|
|
|
100 |
% |
Total
|
|
|
|
|
|
|
177,774 |
|
|
|
|
|
The table
below provides leasing information for the tenant at each respective
property:
First Niagara
Property Location
|
|
|
|
|
|
|
|
|
|
|
Base
Rent per
Square
Foot
|
|
|
Harleysville,
PA
|
|
|
1 |
|
First
Niagara Bank
|
|
See
Footnote(1)
|
|
$ |
1,016,022 |
|
|
|
12.66 |
|
|
Lansdale,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
132,804 |
|
|
|
38.07 |
|
|
Lansdale,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
116,678 |
|
|
|
31.62 |
|
|
Lansford,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
148,614 |
|
|
|
20.40 |
|
|
Lehighton,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
70,209 |
|
|
|
24.48 |
|
|
Limerick,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
122,400 |
|
|
|
24.48 |
|
|
Palmerton,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
245,713 |
|
|
|
21.18 |
|
|
Sellersville,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
82,370 |
|
|
|
24.49 |
|
|
Skippack,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
110,160 |
|
|
|
24.48 |
|
|
Slatington,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
85,211 |
|
|
|
11.64 |
|
|
Slatington,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
266,797 |
|
|
|
13.43 |
|
|
Spring
House, PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
301,838 |
|
|
|
24.66 |
|
|
Summit
Hill, PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
130,152 |
|
|
|
22.44 |
|
|
Walnutport,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
123,196 |
|
|
|
22.44 |
|
|
Wyomissing,
PA
|
|
|
|
|
First
Niagara Bank
|
|
|
|
|
111,751 |
|
|
|
22.44 |
|
|
Total/Average
|
|
|
|
|
|
|
|
|
$ |
3,063,915 |
|
|
$ |
17.23 |
|
|
(1)
|
The
lease agreement for each First Niagara Property contains a number of
consecutive renewal options. After the initial contractual period,
each lease may be renewed for two additional five-year terms. After
both five-year renewal options have been exercised, each lease may be
renewed for an additional three-year period, then for six additional
five-year periods and finally, one additional two-year
period.
|
(2)
|
Remaining
lease term as of July 16, 2010.
|
The
following table outlines the loan terms on the existing debt financing on the
First Niagara Properties. The loan has a fixed rate of 6.59% for the first
six (6) years of the loan term after which the rate resets to the then current
five (5)-year Treasury rate plus 2.25% (with a floor of 6.5%), with interest
only payments for the first three (3) years of the loan term, principal and
interest payments based on a twenty (20)-year amortization period for years four
(4) through ten (10) of the loan term and a 10-year maturity with a 5-year
extension option.
First Niagara Property Location
|
|
|
|
|
|
|
|
Harleysville,
PA
|
|
$ |
10,104,229 |
|
|
|
6.59 |
% |
1/1/2018
|
Lansdale,
PA
|
|
|
1,360,147 |
|
|
|
6.59 |
% |
1/1/2018
|
Lansdale,
PA
|
|
|
1,203,780 |
|
|
|
6.59 |
% |
1/1/2018
|
Lansford,
PA
|
|
|
1,513,258 |
|
|
|
6.59 |
% |
1/1/2018
|
Lehighton,
PA
|
|
|
743,135 |
|
|
|
6.59 |
% |
1/1/2018
|
Limerick,
PA
|
|
|
1,260,965 |
|
|
|
6.59 |
% |
1/1/2018
|
Palmerton,
PA
|
|
|
2,469,757 |
|
|
|
6.59 |
% |
1/1/2018
|
Sellersville,
PA
|
|
|
864,361 |
|
|
|
6.59 |
% |
1/1/2018
|
Skippack,
PA
|
|
|
1,136,628 |
|
|
|
6.59 |
% |
1/1/2018
|
Slatington,
PA
|
|
|
888,856 |
|
|
|
6.59 |
% |
1/1/2018
|
Spring
House, PA
|
|
|
3,029,802 |
|
|
|
6.59 |
% |
1/1/2018
|
Summit
Hill, PA
|
|
|
1,327,933 |
|
|
|
6.59 |
% |
1/1/2018
|
Walnutport,
PA
|
|
|
1,264,531 |
|
|
|
6.59 |
% |
1/1/2018
|
Wyomissing,
PA
|
|
|
1,155,084 |
|
|
|
6.59 |
% |
1/1/2018
|
Slatington,
PA
|
|
|
2,677,534 |
|
|
|
6.59 |
% |
1/1/2018
|
Total
|
|
$ |
31,000,000 |
|
|
|
|
|
|
Rockland
Properties
On April
25, 2008, the REIT’s Board of Trustees approved the acquisition of certain
property owned by Rockland Trust Company (the “Rockland Properties”). The
REIT acquired the Rockland Properties on May 2, 2008.
The
purchase price for the Rockland Properties was approximately $32.1
million. The Rockland Properties are subject to approximately $24.4
million of debt. The remainder of the purchase price was funded with
proceeds from the offering and revolving equity investments.(1)
Rockland Trust, the seller of the Rockland Properties, is an unaffiliated third
party. The Rockland Properties consist of commercial bank branches, bank
branch/offices and operations centers throughout Southeastern Massachusetts and
Cape Cod with an aggregate of approximately 121,000 square feet. The
current sole tenant of the properties is Rockland Trust Company.
_________________
(1)
|
The
proceeds from the offering totaled approximately $2,205,000, the revolving
equity investments totaled $2,500,000 and the short-term convertible
redeemable preferred equity totaled
$3,995,000.
|
Rockland
Property Location
|
|
Acquisition
Purchase
Price(1)
|
|
Approximate
Compensation to
Advisor
and Affiliates
|
Brockton,
MA
|
|
$ |
643,000 |
|
TOTAL
FOR ALL PROPERTIES
=
$566,000
(Acquisition
Fee + Finance
Coordination
Fee)
|
Chatham,
MA
|
|
|
1,500,000 |
|
Hull,
MA
|
|
|
692,000 |
|
Hyannis,
MA
|
|
|
2,377,000 |
|
Middleboro,
MA
|
|
|
3,495,000 |
|
|
Orleans,
MA
|
|
|
1,371,000 |
|
|
Randolph,
MA
|
|
|
1,540,000 |
|
|
Centerville,
MA
|
|
|
1,129,000 |
|
|
Duxbury,
MA
|
|
|
1,323,000 |
|
|
Hanover,
MA
|
|
|
1,320,000 |
|
|
Middleboro,
MA
|
|
|
922,000 |
|
|
Pembroke,
MA
|
|
|
1,546,000 |
|
|
Plymouth,
MA
|
|
|
5,173,000 |
|
|
Rockland,
MA
|
|
|
4,095,000 |
|
|
Rockland,
MA
|
|
|
1,769,000 |
|
|
S.
Yarmouth, MA
|
|
|
1,586,000 |
|
|
Scituate,
MA
|
|
|
1,263,000 |
|
|
West
Dennis, MA
|
|
|
1,384,000 |
|
|
Total
|
|
$ |
33,128,000 |
|
|
(1)
|
Approximate
purchase price includes purchase price plus closing costs, inclusive of
the acquisition fee, which equals 1% of the contract purchase
price.
|
Each
property is 100% leased on a triple-net basis to Rockland Trust Company,
pursuant to which the tenant is required to pay substantially all operating
expenses and capital expenditures in addition to base rent. The guarantor
under the lease is Rockland Trust Company. Each location has four
concurrent renewal options, each for a five-year term at the then prevailing
market rate.
Rockland Property Location
|
|
|
|
|
|
|
|
Base Rent
per
Square Foot
|
|
Remaining
Lease Term
(Years)(1)
|
Middleboro,
MA
|
|
|
18,520 |
|
|
$ |
250,020 |
|
|
$ |
13.50 |
|
|
Hyannis,
MA
|
|
|
8,948 |
|
|
|
170,012 |
|
|
|
19.00 |
|
|
Hull,
MA
|
|
|
1,763 |
|
|
|
49,364 |
|
|
|
28.00 |
|
|
Randolph,
MA
|
|
|
3,670 |
|
|
|
110,100 |
|
|
|
30.00 |
|
|
Duxbury,
MA
|
|
|
2,667 |
|
|
|
90,678 |
|
|
|
34.00 |
|
|
Brockton,
MA
|
|
|
1,835 |
|
|
|
45,875 |
|
|
|
25.00 |
|
|
Centerville,
MA
|
|
|
2,977 |
|
|
|
77,402 |
|
|
|
26.00 |
|
|
Chatham,
MA
|
|
|
3,459 |
|
|
|
107,229 |
|
|
|
31.00 |
|
|
Orleans,
MA
|
|
|
3,768 |
|
|
|
97,968 |
|
|
|
26.00 |
|
|
Pembroke,
MA
|
|
|
3,213 |
|
|
|
106,029 |
|
|
|
33.00 |
|
|
S.
Yarmouth, MA
|
|
|
4,727 |
|
|
|
108,721 |
|
|
|
23.00 |
|
|
Scituate,
MA
|
|
|
2,706 |
|
|
|
86,592 |
|
|
|
32.00 |
|
|
Rockland,
MA
|
|
|
18,425 |
|
|
|
280,981 |
|
|
|
15.25 |
|
|
Rockland,
MA
|
|
|
11,027 |
|
|
|
121,297 |
|
|
|
11.00 |
|
|
Hanover,
MA
|
|
|
2,828 |
|
|
|
90,496 |
|
|
|
32.00 |
|
|
Plymouth,
MA
|
|
|
25,358 |
|
|
|
355,012 |
|
|
|
14.00 |
|
|
Middleboro,
MA
|
|
|
2,106 |
|
|
|
63,180 |
|
|
|
30.00 |
|
|
West
Dennis, MA
|
|
|
3,060 |
|
|
|
94,860 |
|
|
|
31.00 |
|
|
Total/Average
|
|
|
121,057 |
|
|
$ |
2,305,816 |
|
|
$ |
19.05 |
|
|
(1)
|
Weighted
average remaining lease term as of July 16,
2010.
|
The
following table outlines the loan terms on the debt financing assumed in
connection with acquisition of the Rockland Properties:
|
|
|
|
|
|
|
$24,412,500
|
|
Variable
|
|
30-Day
LIBOR+1.375%(1)
|
|
May
2013
|
______________
(1)
|
The
Company entered into a rate lock agreement to limit its interest rate
exposure. The LIBOR floor and cap are 3.54% and 4.125% (initial
year), respectively.
|
Rite
Aid Properties
On
September 29, 2008, American Realty Capital Trust Inc. (the “REIT”) acquired 6
Rite Aid properties (the “Rite Aid Properties”). The REIT acquired the
Rite Aid Properties at sellers’ cost, which does not exceed the fair market
value of the Rite Aid Properties as determined by an appraisal of a qualified
independent appraiser. The purchase price for the Rite Aid Properties is
approximately $18.6 million. The Rite Aid Properties are subject to
approximately $12.8 million of assumed existing debt. The remainder of the
purchase price was funded with revolving equity investment of approximately
$6,000,000 from a related party under an unsecured revolving equity
facility. The sellers of the Rite Aid Properties are two of the REIT’s
sponsors, Nicholas S. Schorsch and William M. Kahane. The Rite Aid
Properties are drug stores in Ohio and Pennsylvania with an aggregate of
approximately 75,000 square feet. The current sole tenant of the
properties is Rite Aid and will remain the sole tenant on a triple-net or
double-net lease basis.
Rite
Aid Property Location
|
|
Acquisition
Purchase Price(1)
|
|
Approximate
Compensation to
Advisor
and Affiliates
|
Lisbon,
OH
|
|
$ |
1,515,000 |
|
TOTAL
FOR ALL PROPERTIES
=
$314,000
(Acquisition
Fee + Finance
Coordination
Fee)
|
East
Liverpool, OH
|
|
|
2,249,000 |
|
Carrollton,
OH
|
|
|
2,376,000 |
|
Cadiz,
OH
|
|
|
1,720,000 |
|
Pittsburgh,
PA
|
|
|
6,334,000 |
|
|
Carlisle,
PA
|
|
|
4,640,000
|
|
|
Total
|
|
$ |
18,834,000
|
|
|
(1)
|
Approximate
purchase price includes purchase price plus closing costs, inclusive of
the acquisition fee, which equals 1% of the contract purchase
price.
|
Two of
the property acquisitions (the Pennsylvania properties) are subject to a
triple-net lease, pursuant to which the tenant is required to pay all operating
expenses and capital expenditures in addition to base rent. Four of the
property acquisitions (the Ohio properties) are subject to double -net leases,
pursuant to which the landlord is responsible for maintaining the property’s
roof and structure, and the tenant is required to pay all other expenses
associated with the property in addition to base rent. The guarantor under
the lease is Rite Aid Corp. The Ohio locations have six concurrent renewal
options, each for a five-year term. The Pennsylvania locations have eight
concurrent renewal options, each for a five-year term. Renewal rates
include certain increases for fixed percentages as well as market adjustments,
as defined by the lease.
Rite Aid Property Location
|
|
|
|
|
|
|
|
Base Rent per
Square Foot
|
|
Remaining Lease
Term (Years)(1)
|
Lisbon,
OH
|
|
|
10,141 |
|
|
$ |
113,174 |
|
|
$ |
11.16 |
|
|
East
Liverpool, OH
|
|
|
11,362 |
|
|
|
169,333 |
|
|
|
14.90 |
|
|
Carrollton,
OH
|
|
|
12,613 |
|
|
|
179,177 |
|
|
|
14.21 |
|
|
Cadiz,
OH
|
|
|
11,335 |
|
|
|
129,024 |
|
|
|
11.38 |
|
|
Pittsburgh,
PA
|
|
|
14,766 |
|
|
|
469,790 |
|
|
|
31.82 |
|
|
Carlisle,
PA
|
|
|
14,702 |
|
|
|
343,728 |
|
|
|
23.38 |
|
|
Total/Average
|
|
|
74,919 |
|
|
$ |
1,404,226 |
|
|
$ |
18.74 |
|
|
(1)
|
Weighted
average remaining lease term as of July 16,
2010.
|
The
following table outlines the loan terms on the debt financing assumed in
connection with acquisition of the Rite Aid Properties.
|
|
|
|
|
|
|
$
12,808,265
|
|
Fixed–Interest
Only
|
|
|
6.97%
|
|
September
2017
|
PNC
Bank (formerly National City Bank) Properties
On August
29, 2008, the REIT’s Board of Trustees (with the two inside directors abstaining
because the acquisition of 2 PNC Bank (formerly National City bank branches)
(the “PNC Bank Properties”) is an affiliated transaction) approved the
acquisition of the PNC Bank Properties. The REIT acquired the branch
located in Palm Coast, FL on September 16, 2008 (the “Palm Coast Property”)(1) and
the bank branch located in Pompano Beach, FL on October 23, 2008 (the “Pompano
Beach Property”).
The
purchase price for the PNC Bank Properties was approximately $6.7 million.
The PNC Bank Properties are subject to approximately $4.5 million of debt,
comprised of loans from TD Bank, NA. in the amounts of approximately
$2.1 million for the Palm Coast Property and $2.4 million for the Pompano
Beach Property. The remainder of the purchase price was funded with
revolving equity investment of approximately $2,400,000 from a related party
under an unsecured revolving equity facility. The seller of the PNC
Bank Properties is an affiliated party. The PNC Bank Properties are
two bank branches in Florida with an aggregate of approximately 8,500 square
feet. The current sole tenant of the properties is PNC Bank Bank and
will remain the sole tenant on a triple-net basis.
PNC Bank Property Location
|
|
Approximate
Purchase
Price
|
|
|
Approximate
Compensation to
Advisor and
Affiliates
|
|
Palm
Coast, FL
|
|
$ |
3,100,000 |
|
|
$ |
51,000 |
|
Pompano
Beach, FL
|
|
|
3,800,000 |
|
|
|
61,000 |
|
Total
|
|
$ |
6,900,000 |
|
|
$ |
112,000 |
|
The
properties are triple-net leased to PNC Bank Bank, pursuant to which PNC Bank
Bank is required to pay all operating expenses and capital expenditures in
addition to base rent, and have primary lease terms of 20 years with a remaining
lease term of 18.6 years at July 16, 2010. Annual rent is $466,465 for
each of the first five years of the initial lease term, increased by 12% every
five years for the Palm Coast Property and 10% every five years for the Pompano
Beach Property.
PNC
Bank Property Location
|
|
|
|
|
|
|
|
Base
Rent
per
Square
Foot
|
|
Palm
Coast, FL
|
|
|
3,740 |
|
|
$ |
210,000 |
|
|
$ |
56.15 |
|
Pompano
Beach, FL
|
|
|
4,663 |
|
|
|
256,465 |
|
|
|
55.00 |
|
Total
|
|
|
8,403
|
|
|
$ |
466,465
|
|
|
$ |
55.51
|
|
(1)
|
American
Realty Capital Operating Partnership, L.P. transferred forty-nine percent
(49%) interest in the Palm Coast Property to American Realty Capital DST,
1, a Section 1031 Exchange Program. See “Section 1031 Exchange
Program” in this prospectus.
|
The
following table outlines the loan terms on the debt financing incurred in
connection with acquisition of the PNC Bank Properties:
PNC
Bank Property Location
|
|
|
|
|
|
|
Palm
Coast, FL
|
|
$ |
2,062,500 |
|
30-day
LIBOR +
150%
|
|
September
16,
2013
|
Pompano
Beach, FL
|
|
|
2,437,500 |
|
30-day
LIBOR +
150%
|
|
October
23, 2013
|
Total/Average
|
|
$ |
4,500,000 |
|
|
|
|
(1)
|
We
limited our interest rate exposure by entering into a rate lock agreement
with a LIBOR floor and cap of 3.37% and 4.45% (initial year),
respectively, for a notional contract amount of approximately $4,115,000
and a fixed rate of 3.565% on a notional contract amount of approximately
$385,000.
|
PNC
Bank Properties
The REIT
acquired 50 bank branches triple-net leased to PNC Bank, National Association
(the “PNC Properties”) on November 25, 2008. On August 12, 2008, the
REIT’s Board of Directors approved the acquisition of the PNC Properties and as
of November 18, 2008 approved the financings with TD Bank, N.A. and KBC Bank,
N.V., each described below.
The
purchase price for the PNC Properties was approximately $42.3 million. The
purchase price was paid with proceeds from the sale of common shares, first
mortgage indebtedness, bridge equity from KBC Bank, N V. (which bridge
equity we expect to pay off during the first quarter of 2009), and funds from
individuals of approximately $2,097,598, $33,398,902, $8,000,000 and $1,089,500,
respectively. The PNC Properties are bank branches in Pennsylvania, New
Jersey and Ohio with an aggregate of approximately 275,000 square feet.
The current sole tenant of the properties is PNC Bank, National Association
(“PNC Bank”) and will remain the sole tenant on a triple-net lease
basis.
|
|
|
|
Approximate
Purchase
Price(1)
|
|
Approximate
Compensation to
Advisor
and Affiliates
|
1001
East Erie Ave
|
|
Philadelphia,
PA
|
|
$ |
904,000 |
|
TOTAL
FOR ALL PROPERTIES
|
108
East Main Street
|
|
Somerset,
PA
|
|
|
1,206,000 |
|
=
$757,000
|
114
West State Street
|
|
Media,
PA
|
|
|
754,000 |
|
(Acquisition
Fee +
|
1152
Main Street
|
|
Paterson,
NJ
|
|
|
829,000 |
|
Finance
Coordination Fee)
|
1170
West Baltimore Pike
|
|
Media,
PA
|
|
|
301,000 |
|
|
12
Outwater Lane
|
|
Garfield,
NJ
|
|
|
1,206,000 |
|
|
1260
McBride Ave
|
|
West
Paterson, NJ
|
|
|
678,000 |
|
|
141
Franklin Turnpike
|
|
Mahwah,
NJ
|
|
|
829,000 |
|
|
1485
Blackwood-Clementon Rd
|
|
Clementon,
PA
|
|
|
1,432,000 |
|
|
150
Paris Ave
|
|
Northvale,
NJ
|
|
|
829,000 |
|
|
16
Highwood Ave
|
|
Tenafly,
NJ
|
|
|
754,000 |
|
|
1921
Washington Valley Road
|
|
Martinsville,
NJ
|
|
|
1,432,000 |
|
|
|
|
|
|
Approximate
Purchase
Price(1)
|
|
Approximate
Compensation to
Advisor
and Affiliates
|
1933
Bordentown Ave
|
|
Parlin,
NJ
|
|
|
980,000 |
|
|
204
Raritan Valley College Drive
|
|
Somerville,
NJ
|
|
|
1,281,000 |
|
|
207
S State St
|
|
Clarks
Summit, PA
|
|
|
528,000 |
|
|
2200
Cottman
|
|
Philadelphia,
PA
|
|
|
1,206,000 |
|
|
222
Ridgewood Ave
|
|
Glen
Ridge, NJ
|
|
|
678,000 |
|
|
2431
Main Street
|
|
Trenton,
NJ
|
|
|
1,507,000 |
|
|
294
Main Ave
|
|
Clifton,
NJ
|
|
|
678,000 |
|
|
30
Main Street
|
|
West
Orange, NJ
|
|
|
829,000 |
|
|
31
S Chester Rd
|
|
Swarthmore,
PA
|
|
|
528,000 |
|
|
315
Haddon Ave
|
|
Haddonfield,
PA
|
|
|
980,000 |
|
|
321
E 33rd St
|
|
Paterson,
NJ
|
|
|
377,000 |
|
|
34
East Market Street
|
|
Blairsville,
PA
|
|
|
678,000 |
|
|
359
Georges Rd
|
|
Dayton,
NJ
|
|
|
1,206,000 |
|
|
36
Bergen St
|
|
Westwood,
NJ
|
|
|
528,000 |
|
|
401
West Tabor Road
|
|
Philadelphia,
PA
|
|
|
528,000 |
|
|
403
N Baltimore St
|
|
Dillsburg,
PA
|
|
|
452,000 |
|
|
404
Pennsylvania Ave East
|
|
Warren,
PA
|
|
|
678,000 |
|
|
410
Main Street
|
|
Orange,
NJ
|
|
|
980,000 |
|
|
424
Broad Street
|
|
Bloomfield,
NJ
|
|
|
829,000 |
|
|
425
Boulevard
|
|
Mountain
Lakes, NJ
|
|
|
1,055,000 |
|
|
45
South Martine Ave
|
|
Fanwood,
NJ
|
|
|
1,206,000 |
|
|
470
Lincoln Avenue
|
|
Pittsburgh,
PA
|
|
|
678,000 |
|
|
49
Little Falls Road
|
|
Fairfield,
NJ
|
|
|
1,959,000 |
|
|
501
Pleasant Valley Way
|
|
West
Orange, NJ
|
|
|
528,000 |
|
|
555
Cranbury Road
|
|
East
Brunswick, NJ
|
|
|
1,130,000 |
|
|
570
Pompton Ave
|
|
Cedar
Grove, NJ
|
|
|
1,356,000 |
|
|
583
Kearny Ave
|
|
Kearny,
NJ
|
|
|
829,000 |
|
|
588
Newark-Pompton Tnpk
|
|
Pompton
Plains, NJ
|
|
|
301,000 |
|
|
5900
N Broad St
|
|
Philadelphia,
PA
|
|
|
603,000 |
|
|
591
Route 33
|
|
Millstone,
NJ
|
|
|
904,000 |
|
|
638
E Landis Ave
|
|
Vineland,
NJ
|
|
|
754,000 |
|
|
6th
& Spring Garden
|
|
Philadelphia,
PA
|
|
|
980,000 |
|
|
7811
Tylersville Road
|
|
West
Chester, OH
|
|
|
1,281,000 |
|
|
82
Greenbrook Road
|
|
Dunellen,
NJ
|
|
|
1,155,000 |
|
|
8340
Germantown Ave
|
|
Philadelphia,
PA
|
|
|
301,000 |
|
|
Cooper
& Delsea
|
|
Deptford,
NJ
|
|
|
979,000 |
|
|
RR1
Box 640
|
|
Tannersville,
PA
|
|
|
903,000
|
|
|
TOTAL
|
|
|
|
$ |
44,813,000
|
|
|
(1)
|
Approximate
purchase price includes purchase price plus closing costs, inclusive of
the acquisition fee, which equals 1% of the contract purchase
price.
|
The
properties are triple-net leased to PNC Bank, pursuant to which PNC Bank will be
required to pay substantially all operating expenses and capital expenditures in
addition to base rent, simultaneously with the acquisition of the properties,
and will have primary lease terms of ten years, with a remaining lease term of
8.4 years as of July 16, 2010. Annual rent is $2,960,000 for each of the
first five years of the initial lease term, increased by 10% in year six.
The leases provide for up to four extensions of successive five-year terms with
an increase in the rental rate by 10% for each additional renewal term.
Following the first year of the lease, the tenant has the right to terminate two
leases within the PNC Properties each calendar year during the term of the
lease, including renewal options, at any time upon at least twelve months’ prior
written notice to the REIT.
|
|
|
|
|
|
|
|
|
|
|
|
1001
East Erie Ave
|
|
Philadelphia,
PA
|
|
|
3,653 |
|
|
$ |
60,000 |
|
|
$ |
16.42 |
|
108
East Main Street
|
|
Somerset,
PA
|
|
|
7,322 |
|
|
|
80,000 |
|
|
|
10.93 |
|
114
West State Street
|
|
Media,
PA
|
|
|
12,344 |
|
|
|
50,000 |
|
|
|
4.05 |
|
1152
Main Street
|
|
Paterson,
NJ
|
|
|
4,405 |
|
|
|
55,000 |
|
|
|
12.49 |
|
1170
West Baltimore Pike
|
|
Media,
PA
|
|
|
2,366 |
|
|
|
20,000 |
|
|
|
8.45 |
|
12
Outwater Lane
|
|
Garfield,
NJ
|
|
|
7,372 |
|
|
|
80,000 |
|
|
|
10.85 |
|
1260
McBride Ave
|
|
West
Paterson, NJ
|
|
|
2,963 |
|
|
|
45,000 |
|
|
|
15.19 |
|
141
Franklin Turnpike
|
|
Mahwah,
NJ
|
|
|
3,281 |
|
|
|
55,000 |
|
|
|
16.76 |
|
1485
Blackwood-Clementon Rd
|
|
Clementon,
PA
|
|
|
3,853 |
|
|
|
95,000 |
|
|
|
24.66 |
|
150
Paris Ave
|
|
Northvale,
NJ
|
|
|
3,537 |
|
|
|
55,000 |
|
|
|
15.55 |
|
16
Highwood Ave
|
|
Tenafly,
NJ
|
|
|
10,908 |
|
|
|
50,000 |
|
|
|
4.58 |
|
1921
Washington Valley Road
|
|
Martinsville,
NJ
|
|
|
5,220 |
|
|
|
95,000 |
|
|
|
18.20 |
|
1933
Bordentown Ave
|
|
Parlin,
NJ
|
|
|
4,355 |
|
|
|
65,000 |
|
|
|
14.93 |
|
204
Raritan Valley College Drive
|
|
Somerville,
NJ
|
|
|
2,423 |
|
|
|
85,000 |
|
|
|
35.08 |
|
207
S State St
|
|
Clarks
Summit, PA
|
|
|
7,170 |
|
|
|
35,000 |
|
|
|
4.88 |
|
2200
Cottman
|
|
Philadelphia,
PA
|
|
|
3,617 |
|
|
|
80,000 |
|
|
|
22.12 |
|
222
Ridgewood Ave
|
|
Glen
Ridge, NJ
|
|
|
9,248 |
|
|
|
45,000 |
|
|
|
4.87 |
|
2431
Main Street
|
|
Trenton,
NJ
|
|
|
3,470 |
|
|
|
100,000 |
|
|
|
28.82 |
|
294
Main Ave
|
|
Clifton,
NJ
|
|
|
1,992 |
|
|
|
45,000 |
|
|
|
22.59 |
|
30
Main Street
|
|
West
Orange, NJ
|
|
|
5,340 |
|
|
|
55,000 |
|
|
|
10.30 |
|
31
S Chester Rd
|
|
Swarthmore,
PA
|
|
|
3,126 |
|
|
|
35,000 |
|
|
|
11.20 |
|
315
Haddon Ave
|
|
Haddonfield,
PA
|
|
|
4,828 |
|
|
|
65,000 |
|
|
|
13.46 |
|
321
E 33rd St
|
|
Paterson,
NJ
|
|
|
2,837 |
|
|
|
25,000 |
|
|
|
8.81 |
|
34
East Market Street
|
|
Blairsville,
PA
|
|
|
12,212 |
|
|
|
45,000 |
|
|
|
3.68 |
|
359
Georges Rd
|
|
Dayton,
NJ
|
|
|
3,660 |
|
|
|
80,000 |
|
|
|
21.86 |
|
36
Bergen St
|
|
Westwood,
NJ
|
|
|
5,160 |
|
|
|
35,000 |
|
|
|
6.78 |
|
401
West Tabor Road
|
|
Philadelphia,
PA
|
|
|
8,653 |
|
|
|
35,000 |
|
|
|
4.04 |
|
403
N Baltimore St
|
|
Dillsburg,
PA
|
|
|
2,832 |
|
|
|
30,000 |
|
|
|
10.59 |
|
404
Pennsylvania Ave East
|
|
Warren,
PA
|
|
|
7,136 |
|
|
|
45,000 |
|
|
|
6.31 |
|
410
Main Street
|
|
Orange,
NJ
|
|
|
8,862 |
|
|
|
65,000 |
|
|
|
7.33 |
|
424
Broad Street
|
|
Bloomfield,
NJ
|
|
|
3,657 |
|
|
|
55,000 |
|
|
|
15.04 |
|
425
Boulevard
|
|
Mountain
Lakes, NJ
|
|
|
2,732 |
|
|
|
70,000 |
|
|
|
25.62 |
|
45
South Martine Ave
|
|
Fanwood,
NJ
|
|
|
2,078 |
|
|
|
80,000 |
|
|
|
38.50 |
|
470
Lincoln Avenue
|
|
Pittsburgh,
PA
|
|
|
2,760 |
|
|
|
45,000 |
|
|
|
16.30 |
|
49
Little Falls Road
|
|
Fairfield,
NJ
|
|
|
5,549 |
|
|
|
130,000 |
|
|
|
23.43 |
|
501
Pleasant Valley Way
|
|
West
Orange, NJ
|
|
|
3,358 |
|
|
|
35,000 |
|
|
|
10.42 |
|
555
Cranbury Road
|
|
East
Brunswick, NJ
|
|
|
16,324 |
|
|
|
75,000 |
|
|
|
4.59 |
|
570
Pompton Ave
|
|
Cedar
Grove, NJ
|
|
|
4,773 |
|
|
|
90,000 |
|
|
|
18.86 |
|
583
Kearny Ave
|
|
Kearny,
NJ
|
|
|
7,408 |
|
|
|
55,000 |
|
|
|
7.42 |
|
588
Newark-Pompton Tnpk
|
|
Pompton
Plains, NJ
|
|
|
4,196 |
|
|
|
20,000 |
|
|
|
4.77 |
|
5900
N Broad St
|
|
Philadelphia,
PA
|
|
|
7,070 |
|
|
|
40,000 |
|
|
|
5.66 |
|
638
E Landis Ave
|
|
Vineland,
NJ
|
|
|
17,356 |
|
|
|
50,000 |
|
|
|
2.88 |
|
6th
& Spring Garden
|
|
Philadelphia,
PA
|
|
|
3,737 |
|
|
|
65,000 |
|
|
|
17.39 |
|
7811
Tylersville Road
|
|
West
Chester, OH
|
|
|
2,988 |
|
|
|
85,000 |
|
|
|
28.45 |
|
82
Greenbrook Road
|
|
Dunellen,
NJ
|
|
|
2,784 |
|
|
|
70,000 |
|
|
|
25.14 |
|
8340
Germantown Ave
|
|
Philadelphia,
PA
|
|
|
7,096 |
|
|
|
20,000 |
|
|
|
2.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
9
West Somerset Street
|
|
Raritan,
NJ
|
|
|
8,033 |
|
|
|
80,000 |
|
|
|
9.96 |
|
Cooper
& Delsea
|
|
Deptford,
NJ
|
|
|
5,160 |
|
|
|
65,000 |
|
|
|
12.60 |
|
RR1
Box 640
|
|
Tannersville,
PA
|
|
|
2,070
|
|
|
|
60,000
|
|
|
|
28.99
|
|
TOTAL/AVERAGE
|
|
|
|
|
272,436
|
|
|
$ |
2,960,000
|
|
|
$ |
10.75
|
|
The REIT
has secured first mortgage indebtedness from TD Bank, N.A. The following
table outlines the loan terms on the debt financing incurred in connection with
acquisition of the PNC Properties. The loan will be secured by a mortgage
on each of the PNC Properties.
|
|
|
|
|
|
$ |
33,398,902 |
|
|
|
5.25%
|
|
November
25, 2013
|
(1)
|
Rate
is the effective yield based on 30-day Libor plus 1.65%, and the effects
of an interest rate swap entered into prior to closing on this
mortgage.
|
PNC Bank
is a $128.6 billion commercial bank holding company with $76.5 billion in
deposits. It is based in Pittsburgh, Pennsylvania, and has more than 1,100
branches, 3,900 automated teller machines and more than 25,000 employees.
It is rated S&P AA- and is one of the largest commercial banking companies
in the United States ranked by assets and deposits. It offers retail
banking, corporate and institutional banking, asset management and global fund
processing services. The following information relates to PNC Bank’s
Parent company, PNC Financial Services Group, Inc.:
|
|
|
|
|
For the Fiscal Year Ended
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,763
|
|
|
$ |
16,228
|
|
|
$ |
9,680
|
|
|
$ |
10,088
|
|
|
|
|
648
|
|
|
|
3,225
|
|
|
|
2,760
|
|
|
|
3,292
|
|
|
|
|
671
|
|
|
|
2,003
|
|
|
|
882
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
265,396
|
|
|
$ |
269,863
|
|
|
$ |
291,081
|
|
|
$ |
138,920
|
|
|
|
|
238,578
|
|
|
|
239,921
|
|
|
|
263,433
|
|
|
|
122,412
|
|
|
|
|
26,818
|
|
|
|
29,942
|
|
|
|
25,422
|
|
|
|
14,854
|
|
Walgreens
Location — Sealy, TX
On July
17, 2009, the REIT acquired a fee ownership interest in a Walgreens retail
location net leased to Walgreens Co.
The
purchase price, excluding transaction costs and fees, was approximately $3.8
million and is comprised of a combination of mortgage financing, proceeds from
the sale of common shares and funds received from an unaffiliated joint venture
partner. The Company entered into a ten-year financing agreement and
received proceeds of approximately $1.6 million. The note agreement bears
interest at an initial rate of 6.55%. Upon completion of this acquisition,
the Company owns an approximate 56% interest in the asset, while the joint
venture investor owns an approximate 44% interest. The Walgreens location
is a 14,850 square foot retail property located in Sealy, TX. The current
sole tenant of the property is Walgreens Co. and will remain the sole tenant on
a triple-net lease basis.
|
|
|
|
|
|
|
Approximate
Compensation to
Advisor and Affiliates
|
|
1808
Meyer Street
|
|
Sealy,
TX
|
|
$ |
3,818,000 |
|
|
$ |
54,000 |
|
The
Walgreens location is net leased to Walgreens Co., pursuant to which Walgreens
Co. is required to pay substantially all operating expenses (including all costs
to maintain and repair the roof and structure of the building) and capital
expenditures in addition to base rent, simultaneously with the acquisition of
the properties. The primary lease term is twenty-five years, having
commenced June 18, 2007, and provides for up to fifty successive one-year
extensions. Annual rent is $310,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
Lease Term
(Years)(1)
|
|
1808
Meyer Street
|
|
Sealy,
TX
|
|
|
14,850 |
|
|
$ |
310,000 |
|
|
$ |
20.88 |
|
|
|
22.0 |
|
(1)
|
Lease
expires on June 18, 2032, remaining lease term as of July 16,
2010.
|
CVS
Caremark Corporation Store Locations
On
September 18, 2009, the Company acquired a portfolio of ten newly constructed
retail stores (the “Stores”) directly from CVS Caremark Corporation
(“CVS”). The Stores contain an aggregate of 131,105 square feet, located
in 9 states — Illinois, South Carolina, Texas, Georgia, Michigan, New York,
Arizona, North Carolina and California. The aggregate purchase price is
approximately $40.8 million, inclusive of all closing costs and
fees.
|
|
|
|
|
|
|
|
Approximate
Compensation to
Advisor
and Affiliates
|
|
|
|
|
|
|
$ |
4,748,926
|
|
|
|
|
|
|
|
|
|
|
3,236,033
|
|
|
|
|
|
|
|
|
|
|
5,875,437
|
|
|
|
800
East West Connector SW
|
|
|
|
|
|
|
4,725,169
|
|
|
|
|
|
|
|
|
|
|
4,574,854
|
|
|
|
|
|
|
|
|
|
|
4,305,659
|
|
|
|
|
|
|
|
|
|
|
3,566,663
|
|
|
|
|
|
|
|
|
|
|
3,527,631
|
|
|
|
|
|
|
|
|
|
|
1,894,084
|
|
|
|
|
|
|
|
|
|
|
3,069,405
|
|
|
|
|
|
|
|
|
|
$ |
39,523,861
|
|
$ |
|
The
primary lease term under this net lease arrangement is twenty-five years, having
commenced simultaneous with closing, and provides for two fixed-rent options of
five years each, plus eight fair market value options of five years each.
The average annual base rent on a straight-line basis over the initial lease
term is approximately $3.4 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,225 |
|
|
$ |
30.78 |
|
|
$ |
406,983 |
|
|
|
|
|
|
|
|
|
11,945 |
|
|
|
23.22 |
|
|
|
277,328 |
|
|
|
|
|
|
|
|
|
12,900 |
|
|
|
39.03 |
|
|
|
503,525 |
|
|
800
East West Connector SW
|
|
|
|
|
|
|
12,900 |
|
|
|
31.39 |
|
|
|
404,947 |
|
|
|
|
|
|
|
|
|
17,847 |
|
|
|
21.97 |
|
|
|
392,065 |
|
|
|
|
|
|
|
|
|
13,225 |
|
|
|
27.90 |
|
|
|
368,995 |
|
|
|
|
|
|
|
|
|
10,880 |
|
|
|
28.09 |
|
|
|
305,663 |
|
|
|
|
|
|
|
|
|
13,013 |
|
|
|
23.23 |
|
|
|
302,318 |
|
|
|
|
|
|
|
|
|
11,945 |
|
|
|
13.59 |
|
|
|
162,323 |
|
|
|
|
|
|
|
|
|
13,225 |
|
|
|
19.89 |
|
|
|
263,048 |
|
|
|
|
|
|
|
|
|
131,105 |
|
|
$ |
25.84 |
|
|
$ |
3,387,195 |
|
|
(1)
|
Lease
will expire in September 2034. Remaining lease term is as of July 16,
2010.
|
The
purchase price was comprised of a combination of proceeds from the sale of
common shares and proceeds received from a ten-year non-recourse, fixed-rate
first mortgage loan totaling approximately $23.8 million from Western &
Southern Life Assurance Company. The fixed interest rate is 6.875% for the
initial five years of the loan term.
|
|
|
|
|
|
$ |
23,750,000 |
|
|
|
6.875%
|
|
September
2019
|
CVS, a
pharmacy services company, provides prescriptions and related health care
services in the United States. CVS operates through two segments, Pharmacy
Services and Retail Pharmacy. The Pharmacy Service segment provides a
range of prescription benefit management services, including mail order pharmacy
services, specialty pharmacy services, plan design and administration, formulary
management, and claims processing. This segment serves primarily
employers, insurance companies, unions, government employee groups, managed care
organizations and other sponsors of health benefit plans, and individuals.
As of December 31, 2008, the Pharmacy Services segment operated 58 retail
specialty pharmacy stores, 19 specialty mail order pharmacies, and 7 mail
service pharmacies located in 26 states of the United States, Puerto Rico, and
the District of Columbia. The Retail Pharmacy Segment sells prescription
drugs, over-the-counter drugs, beauty products and cosmetics, photo finishing,
seasonal merchandise, greeting cards, and convenience foods through its pharmacy
retail stores, and online. This segment also provides health care
services. As of December 31, 2008, this segment operated 6,923 retail
drugstores located in 41 states and the District of Columbia; and 560 retail
health care clinics in 27 states. CVS was founded in 1892 and is
headquartered in Woonsocket, Rhode Island. CVS Caremark Corporation stock
is listed on the New York Stock Exchange (NYSE: “CVS”), and has a credit
rating of BBB+ by Standard & Poor’s.
CVS
Pharmacy Portfolio II
On
November 3, 2009, the REIT’s Board of Directors approved the acquisition of the
CVS Properties II. On November 19, 2009, the Company acquired a portfolio
of fifteen newly-constructed retail stores (the “CVS Properties II”) directly
from CVS Pharmacy, Inc. The CVS Properties II contain an aggregate of
approximately 199,000 square feet, located in 11 states -Alabama, Arizona,
California, Florida, Georgia, Indiana, Maine, Minnesota, Missouri, North
Carolina and Nevada. The aggregate purchase price is approximately $60.0
million, inclusive of all closing costs and fees.
The
purchase price is comprised of a combination of proceeds from the sale of the
Company’s common shares and proceeds received from a five-year non-recourse,
fixed-rate first mortgage loan totaling approximately $33.1 million. The
fixed interest rate is 6.55% for the term of the loan.
|
|
|
|
|
|
|
|
|
Compensation
to Advisor
and
Affiliate(1)
|
|
5211
Neal Trail Dr.
|
|
Walkertown
|
|
NC
|
|
$ |
3,705,204 |
|
|
|
|
|
612
N. Main St.
|
|
Creedmoor
|
|
NC
|
|
|
3,380,699 |
|
|
|
|
|
1888
Ogletree Rd.
|
|
Auburn
|
|
AL
|
|
|
4,224,431 |
|
|
|
|
|
4145
NW 53rd
Ave.
|
|
Gainesville
|
|
FL
|
|
|
5,968,893 |
|
|
|
|
|
50
Duval Station Rd.
|
|
Jacksonville
|
|
FL
|
|
|
4,429,342 |
|
|
|
|
|
505
County Road 1100 N
|
|
Chesterton
|
|
IN
|
|
|
5,925,600 |
|
|
|
|
|
601
Howard Simmons Rd.
|
|
East
Ellijay
|
|
GA
|
|
|
3,825,510 |
|
|
|
|
|
300
S. Commercial
|
|
Harrisonville
|
|
MO
|
|
|
3,757,909 |
|
|
|
|
|
151
Village Walk Dr.
|
|
Holly
Springs
|
|
NC
|
|
|
3,806,651 |
|
|
|
|
|
384
Elm St.
|
|
Biddeford
|
|
ME
|
|
|
3,615,565 |
|
|
|
|
|
7996
Brooklyn Blvd.
|
|
Brooklyn
Park
|
|
MN
|
|
|
2,706,251 |
|
|
|
|
|
1905
Marth Berry Blvd.
|
|
Rome
|
|
GA
|
|
|
3,033,849 |
|
|
|
|
|
1081
Steamboat Pkwy.
|
|
Reno
|
|
NV
|
|
|
3,036,074 |
|
|
|
|
|
180
N Dobson Rd.
|
|
Chandler
|
|
AZ
|
|
|
3,883,302 |
|
|
|
|
|
9256
E Slauson Ave.
|
|
Pico
Rivera
|
|
CA
|
|
|
4,488,682 |
|
|
|
|
|
(1)
|
Compensation
to advisor and affiliate includes acquisition fees and financing
coordination fees.
|
The CVS
Properties II are net leased to CVS Pharmacy, Inc., pursuant to which CVS
Pharmacy, Inc. will be required to pay all operating expenses and capital
expenditures in addition to base rent, simultaneously with the acquisition of
the properties. The weighted average primary lease term under this net
lease arrangement is approximately 24.0 years as of July 16, 2010, having
commenced simultaneous with closing, and provides for two fixed-rent options of
five years each, plus eight fair market value options of five years each.
The average annual base rent on a straight-line basis over the initial lease
term is approximately $5.4 million. Annual rent is approximately $5.0
million for the first year of the initial lease term, and annual rent will
increase by 5% every five years.
Address
|
|
City
|
|
State
|
|
Total
Square
Feet
Leased
|
|
|
Rent Per
Square Foot
|
|
|
Year 1
Rent
|
|
|
Initial
Lease
Term
(Years)
|
|
5211
Neal Trail Dr.
|
|
Walkertown
|
|
NC
|
|
|
12,900 |
|
|
$ |
37.72 |
|
|
$ |
486,621 |
|
|
|
25 |
|
612
N. Main St.
|
|
Creedmoor
|
|
NC
|
|
|
12,900 |
|
|
|
27.91 |
|
|
|
360,000 |
|
|
|
25 |
|
1888
Ogletree Rd.
|
|
Auburn
|
|
AL
|
|
|
11,945 |
|
|
|
23.10 |
|
|
|
275,894 |
|
|
|
25 |
|
4145
NW 53rd
Ave.
|
|
Gainesville
|
|
FL
|
|
|
13,225 |
|
|
|
36.78 |
|
|
|
486,371 |
|
|
|
25 |
|
50
Duval Station Rd.
|
|
Jacksonville
|
|
FL
|
|
|
13,225 |
|
|
|
23.19 |
|
|
|
306,725 |
|
|
|
25 |
|
505
County Road 1100 N
|
|
Chesterton
|
|
IN
|
|
|
13,225 |
|
|
|
23.53 |
|
|
|
311,160 |
|
|
|
25 |
|
601
Howard Simmons Rd.
|
|
East
Ellijay
|
|
GA
|
|
|
13,225 |
|
|
|
22.89 |
|
|
|
302,760 |
|
|
|
25 |
|
300
S. Commercial
|
|
Harrisonville
|
|
MO
|
|
|
13,225 |
|
|
|
23.60 |
|
|
|
312,086 |
|
|
|
25 |
|
151
Village Walk Dr.
|
|
Holly
Springs
|
|
NC
|
|
|
12,900 |
|
|
|
26.70 |
|
|
|
344,457 |
|
|
|
25 |
|
384
Elm St.
|
|
Biddeford
|
|
ME
|
|
|
13,013 |
|
|
|
17.93 |
|
|
|
233,306 |
|
|
|
25 |
|
7996
Brooklyn Blvd.
|
|
Brooklyn
Park
|
|
MN
|
|
|
13,625 |
|
|
|
19.25 |
|
|
|
262,300 |
|
|
|
25 |
|
1905
Marth Berry Blvd.
|
|
Rome
|
|
GA
|
|
|
13,225 |
|
|
|
23.70 |
|
|
|
313,494 |
|
|
|
20 |
|
1081
Steamboat Pkwy.
|
|
Reno
|
|
NV
|
|
|
15,887 |
|
|
|
24.55 |
|
|
|
389,979 |
|
|
|
24 |
|
180
N Dobson Rd.
|
|
Chandler
|
|
AZ
|
|
|
13,013 |
|
|
|
25.87 |
|
|
|
336,617 |
|
|
|
24 |
|
9256
E. Slauson Ave.
|
|
Pico
Rivera
|
|
CA
|
|
|
13,013 |
|
|
|
20.13 |
|
|
|
261,900 |
|
|
|
25 |
|
Total
|
|
|
|
|
|
|
198,546 |
|
|
$ |
25.10 |
|
|
$ |
4,983,670 |
|
|
|
24.7 |
|
The
Company has secured first mortgage indebtedness from Ladder Capital Finance,
LLC. The following table outlines the terms of the debt financing incurred
in connection with acquisitions of the CVS Properties II. The non-recourse
loan will be secured by a mortgage on all of the CVS Properties II.
|
|
|
|
|
|
$ |
33,068,100 |
|
|
|
6.55%(1)
|
|
five
years
|
(1)
|
Weighted
average rate — interest rate on fee simple properties is 6.50%; interest
rate on leasehold properties is
6.65%.
|
The net
leases are guaranteed by CVS Caremark Corporation (“CVS”), a pharmacy services
company, which provides prescriptions and related healthcare services in the
United States. CVS operates through two segments, Pharmacy Services and
Retail Pharmacy. The Pharmacy Service segment provides a range of
prescription benefit management services, including mail order pharmacy
services, specialty pharmacy services, plan design and administration, formulary
management, and claims processing. This segment serves primarily
employers, insurance companies, unions, government employee groups, managed care
organizations and other sponsors of health benefit plans, and individuals.
As of December 31, 2008, the Pharmacy Services segment operated 58 retail
specialty pharmacy stores, 19 specialty mail order pharmacies, and 7 mail
service pharmacies located in 26 states of the United States, Puerto Rico, and
the District of Columbia. The Retail Pharmacy Segment sells prescription
drugs, over-the-counter drugs, beauty products and cosmetics, photo finishing,
seasonal merchandise, greeting cards, and convenience foods through its pharmacy
retail stores, and online. This segment also provides health care
services. As of December 31, 2008, this segment operated 6,923 retail
drugstores located in 41 states and the District of Columbia; and 560 retail
health care clinics in 27 states.
CVS was
founded in 1892 and is headquartered in Woonsocket, Rhode Island. CVS
stock is listed on the New York Stock Exchange (NYSE: “CVS”), and has a
credit rating of BBB+ by Standard & Poor’s.
CVS
currently files its financial statements in reports filed with the Securities
and Exchange Commission, and the following summary financial data regarding CVS
are taken from such filings:
(Amounts in millions)
|
|
Three Months
Ended
|
|
|
For the Fiscal Year Ended
|
|
|
|
Mar. 31,
2010
|
|
|
Dec. 31,
2009
|
|
|
Dec. 31,
2008
|
|
|
Dec. 29,
2007
|
|
Consolidated
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
23,760 |
|
|
$ |
98,729 |
|
|
$ |
87,472 |
|
|
$ |
76,329 |
|
Gross
profit
|
|
|
4,746 |
|
|
|
20,380 |
|
|
|
18,290 |
|
|
|
16,108 |
|
Net
earnings
|
|
|
771 |
|
|
|
3,696 |
|
|
|
3,212 |
|
|
|
2,637 |
|
|
|
|
|
|
As of the Fiscal Year Ended
|
|
|
|
Mar. 31,
2010
|
|
|
Dec. 31,
2009
|
|
|
Dec. 31,
2008
|
|
|
Dec. 29,
2007
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
61,284 |
|
|
$ |
61,641 |
|
|
$ |
60,960 |
|
|
$ |
54,722 |
|
Long-term
debt
|
|
|
8,454 |
|
|
|
8,756 |
|
|
|
8,057 |
|
|
|
8,350 |
|
Shareholders’
equity
|
|
|
35,694 |
|
|
|
35,768 |
|
|
|
34,574 |
|
|
|
31,322 |
|
Home
Depot Distribution Facility — Topeka, Kansas
On August
25, 2009, the REIT’s Board of Directors approved the acquisition of the Home
Depot Facility. On December 11, 2009, the Company acquired a leasehold
interest in a build-to-suit Home Depot Distribution Facility that will service
Home Depot stores in the Kansas City region (the “Home Depot Facility”).
The Home Depot Facility is a “Rapid Deployment Center” of approximately 465,600
square feet located in Topeka, KS. The aggregate purchase price is
approximately $23.5 million, inclusive of all closing costs and fees. The
primary lease term under this net lease arrangement is twenty years with a
remaining lease term of 19.5 years at July 16, 2010, having commenced
simultaneous with closing, and provides for two extensions of successive
five-year terms. The average annual base rent over the initial lease term
is approximately $2.2 million.
The
purchase price is comprised of a combination of proceeds from the sale of common
shares and proceeds received from a four-year non-recourse, fixed-rate first
mortgage loan totaling approximately $13.7 million. The first three years
of the loan are considered the initial term with a fixed interest rate of 6.25%,
and the loan includes a one-year extension option at an interest rate of
6.50%.
|
|
|
|
|
|
|
|
|
Compensation
to Advisor and
Affiliate(1)
|
|
5200
SW Wenger Street
|
|
Topeka
|
|
KS
|
|
$ |
23,531,680 |
|
|
$ |
365,763 |
|
(1)
|
Compensation
to advisor and affiliate includes acquisition fees and financing
arrangement fees.
|
The Home
Depot Facility is net leased to Home Depot U.S.A., Inc. (“Home Depot”) pursuant
to which Home Depot will be required to pay all operating expenses and capital
expenditures in addition to base rent, simultaneously with the acquisition of
the properties, and have a primary lease term of 20 years. Annual rent is
approximately $1.8 million for the first year of the initial lease term, which
increases 2% annually.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
Lease Term
(Years) (1)
|
|
5200
SW Wenger Street
|
|
Topeka
|
|
KS
|
|
|
465,600 |
|
|
$ |
3.88 |
|
|
$ |
1,805,961 |
|
|
|
19.5 |
|
(1)
|
Remaining
lease term is as of July 19, 2010.
|
The
Company had secured first mortgage indebtedness from the seller of the Home
Depot Facility, HD Topeka, LLC of $13.6 million. This facility was
subsequently refinanced with a new first mortgage loan. The following
table outlines the terms of the debt financing incurred in connection with the
current financing of the Home Depot Facility. The loan will be secured by
a mortgage on the Home Depot Facility.
|
|
|
|
|
|
$ |
12,150,000 |
|
|
|
5.95%
|
|
July
2020
|
Bridgestone
Portfolio
On
November 3, 2009, the REIT’s Board of Directors approved the acquisition of the
Bridgestone properties. The REIT acquired a portfolio of six
recently-constructed Morgan Tire and Auto (“MTA”) stores in December 2009 and
January 2010 (the “Bridgestone Properties”). MTA is a wholly owned
subsidiary of the Bridgestone Corporation. MTA operates the stores as
Hibdon Tires Plus. Bridgestone Retail Operations, LLC, as further
described below, guarantees the leases. The portfolio consists of six
build-to-suit, freestanding, fee-simple properties. The purchase price for
the Bridgestone Properties is approximately $15.0 million including closing
costs and fees paid to the advisor. The purchase price was paid with
proceeds from the sale of common shares. The Bridgestone Properties are
located in Oklahoma and Florida, with an aggregate of 57,236 of square
feet. The current sole tenant of the properties is MTA and will remain the
sole tenant on a double-net lease basis. Bridgestone Retail Operations,
LLC, which is a wholly owned subsidiary of Bridgestone Americas, Inc., will
guarantee the property leases.
|
|
|
|
|
|
|
|
Approximate
Compensation to
Advisor and
Affiliates
|
560
Shedeck Parkway
|
|
Yukon
|
|
OK
|
|
$ |
2,517,019 |
|
|
|
1032
W. Danforth Road
|
|
Edmond
|
|
OK
|
|
|
2,533,728 |
|
|
|
7816
South Olympia Avenue
|
|
Tulsa
|
|
OK
|
|
|
2,628,549 |
|
|
|
Highway
I-69 & 96th
Street
|
|
Owasso
|
|
OK
|
|
|
2,432,567 |
|
|
|
13405
N. Pennsylvania Ave
|
|
Oklahoma
City
|
|
OK
|
|
|
2,355,038 |
|
|
|
1781
Blanding Blvd.
|
|
Middleburg
|
|
FL
|
|
|
2,576,421 |
|
|
|
Total
|
|
|
|
|
|
$ |
15,043,322 |
|
$ |
|
The
Bridgestone Properties are double-net leased to MTA, pursuant to which the
landlord is responsible for maintaining the property’s roof and structure, and
the tenant is required to pay all other expenses associated with the property in
addition to base rent, simultaneously with the acquisition of the
properties. The Bridgestone Properties’ original lease at commencement was
15 years with an average of 13.9 years currently remaining as of July 16,
2010. The double-net leases contain contractual rental escalations of
6.25% every five years, with the landlord responsible for roof and
structure. Annual rent is approximately $1.3 million for the first year of
the initial lease term, and annual rent will increase by 6.25% every five
years. The lease provides for four renewal options at five years
each.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
Term
Remaining
(Years) (1)
|
560
Shedeck Parkway
|
|
Yukon
|
|
OK
|
|
|
10,118 |
|
|
$ |
21.00 |
|
|
$ |
212,460 |
|
|
1032
W. Danforth Road
|
|
Edmond
|
|
OK
|
|
|
10,118 |
|
|
|
21.14 |
|
|
|
213,882 |
|
|
7816
South Olympia Avenue
|
|
Tulsa
|
|
OK
|
|
|
10,118 |
|
|
|
21.92 |
|
|
|
221,736 |
|
|
Highway
I-69 & 96th
Street
|
|
Owasso
|
|
OK
|
|
|
9,723 |
|
|
|
21.12 |
|
|
|
205,311 |
|
|
13405
N. Pennsylvania Ave
|
|
Oklahoma
City
|
|
OK
|
|
|
9,116 |
|
|
|
21.80 |
|
|
|
198,743 |
|
|
1781
Blanding Blvd.
|
|
Middleburg
|
|
FL
|
|
|
8,143 |
|
|
|
26.71 |
|
|
|
217,459 |
|
|
Total/
Lease Term
Remaining Average
|
|
|
|
|
|
|
57,336 |
|
|
$ |
21.99 |
|
|
$ |
1,269,591 |
|
|
(1)
|
Weighted
average remaining lease term as of July 16,
2010.
|
We have
financed the acquisition post-closing with a $3.8 million 20-year first mortgage
loan from Zion First National Bank Capital at an interest rate of
6.519%.
Bridgestone
Retail Operations, LLC, the lease guarantor, is a wholly owned subsidiary of
Bridgestone Americas, Inc. It consists of more than 2,200 company-owned
vehicle service and tire locations across the United States, including Firestone
Complete Auto Care, Tires Plus, ExpertTire and Wheel Works store
locations. Bridgestone Corp. reports earnings on a consolidated
basis and does not provide stand-alone financials on its subsidiaries. For
the fiscal year ended December 31, 2008, Bridgestone Corp. posted net
sales of $35.5 billion. Bridgestone Corporation is rated “BBB+” by S&P
and “A3” by Moody’s.
Advanced
Auto Property
The REIT
acquired an Advance Auto store in December 2009. The 7,000 square foot
facility in Plainfield, MI. was purchased for approximately $1.7 million and was
paid for from the proceeds from the sale of common shares. The remaining
lease term on the facility is 11.4 years as of July 16, 2010, with an annual
rent of approximately $160,000.
On June
4, 2010, we acquired three build-to-suit free standing, fee simple retail auto
parts stores for Advance Auto Parts, Inc. for $3,683,000 inclusive of all
closing costs and fees. The properties contain 19,253 square feet of gross
leasable area. The properties are located in Harvest, Alabama, Vicksburg,
Mississippi and Crystal Springs, Mississippi. The tenant is Advance Co., Inc.,
which is rated BBB- by Standard & Poor’s.
The
primary lease term is 15 years, with an average of 13.0 years currently
remaining. The leases do not contain rent escalations during the primary
term and are double net whereby the landlord is responsible for roof and
structure. The leases provide for three renewal options of 5 years each
with 5% rental increase at each option. The average annual base rent for
the initial term is approximately $308,000. The lease also provides for
the payment of a percentage of sales over certain sales thresholds.
Fresenius
Medical Distribution Portfolio
We
acquired two build-to-suit distribution facilities from Fresenius Medical Care
North America, a wholly owned subsidiary of Fresenius Medical Care AG & Co.
KgaA on January 29, 2010, to be leased by their wholly owned subsidiary
Fresenius USA Manufacturing, Inc. (the “Fresenius Properties”). The
distribution facilities are each approximately 70,000 square feet, and are
located in Apple Valley, CA and Shasta Lake, CA. The aggregate purchase
price was approximately $12.5 million, inclusive of all closing costs and
fees.
|
|
|
|
|
|
|
|
|
Approximate
Compensation to
Advisor and
Affiliates(1)
|
|
Navajo
Rd and Lafayette Street
|
|
Apple
Valley
|
|
CA
|
|
$ |
6,107,965 |
|
|
|
|
3415
Bronze Court
|
|
Shasta
lake
|
|
CA
|
|
|
6,374,759 |
|
|
|
|
Total
|
|
|
|
|
|
$ |
12,482,724 |
|
|
$ |
182,733 |
|
(1)
|
Compensation
to Advisor and affiliate includes acquisition fees and financing
arrangement fees.
|
The
Fresenius Properties are double net leased whereby the landlord is responsible
for roof and structure and the tenant is required to pay all other
expenses. The primary lease term is 15 years, with a remaining lease term
of approximately 12.0 years as of July 16, 2010, and provides for contractual
rent escalations of 10% every 5 years. The lease will also provide for two
5-year renewal options. The average annual base rent on a straight-line
basis over the initial lease term is approximately $1.2 million. The
leases will be guaranteed by Fresenius National Medical Care Holdings, Inc. (a
wholly owned subsidiary of Fresenius Medical Care AG & Co. KgaA (“Fresenius
Medical Care”)) which has a senior unsubordinated rating of BB+ by Standard
& Poor’s.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
Term
Remaining
(Years) (1)
|
|
Navajo
Rd and Lafayette Street
|
|
Apple
Valley
|
|
CA
|
|
|
70,000 |
|
|
$ |
7.15 |
|
|
$ |
500,500 |
|
|
|
|
3415
Bronze Court
|
|
Shasta
lake
|
|
CA
|
|
|
70,000 |
|
|
|
7.47 |
|
|
|
522,900 |
|
|
|
|
Total/
Lease Term Remaining Average
|
|
|
|
|
|
|
140,000 |
|
|
$ |
7.31 |
|
|
$ |
1,023,400 |
|
|
|
12.0 |
|
(1)
|
Weighted
average remaining lease term as of July 16,
2010.
|
The
purchase price is comprised of a combination of approximately $6.1 million of
proceeds received from a first mortgage loan and proceeds from the sale of
common shares.
|
|
|
|
|
|
$ |
6,090,000 |
|
|
|
6.625%
|
|
February
11, 2015
|
Fresenius
Medical Services is a kidney dialysis company, operating in both the field of
dialysis products and the field of dialysis services operating more than 1,700
outpatient dialysis clinics in the United States. The Renal Therapies
Group, which was acquired by Fresenius Medical Services, is responsible for the
manufacture and distribution of a variety of dialysis products and equipment,
including dialysis machines, dialyzers and other dialysis related
supplies.
Reckitt
Benckiser Warehouse Facility — Tooele, UT
On
February 16, 2010, American Realty Capital Trust, Inc. (the “Company”) acquired
a build-to-suit warehouse facility for Reckitt Benckiser. The warehouse
facility is approximately 574,000 square feet, located in Tooele, Utah, near
Salt Lake City. The aggregate purchase price was approximately $32.0
million, inclusive of all closing costs and fees. The primary lease term
under this net lease arrangement, pursuant to which Reckitt Benckiser will be
required to pay all operating expenses and capital expenditures in addition to
base rent, is 12.3 years, with a remaining lease term of approximately 11.6
years as of July 16, 2010, and provides for annual rent escalations of 2% each
year. The lease also provides for three 5-year renewal options. The
average annual base rent on a straight-line basis over the initial lease term is
approximately $2.7 million.
The
purchase price is 50% comprised of proceeds from the sale of common shares and
50% from proceeds received from a first mortgage loan totaling approximately
$15.0 million. We have granted a minority interest in the property to on
unaffiliated third party.
|
|
|
|
|
|
|
|
|
Compensation to
Advisor and
Affiliates(1)
|
|
3226
Sheep Lane North
|
|
Tooele
|
|
UT
|
|
$ |
31,748,538 |
|
|
$ |
461,000 |
|
Compensation
to advisor and affiliate includes acquisition fees and financing arrangement
fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
Lease Term
(Years)
|
|
3226
Sheep Lane North
|
|
Tooele
|
|
UT
|
|
|
574,106 |
|
|
$ |
4.16 |
|
|
$ |
2,385,866 |
|
|
|
11.6 |
|
(1)
|
Weighted
average remaining lease term as of July 16,
2010.
|
The
Company has secured a seven-year non-recourse first mortgage loan from Bank of
Texas. The following table outlines the terms of the debt financing
incurred in connection with acquisition of the warehouse facility. The
loan will be secured by a mortgage on the warehouse facility.
|
|
|
|
|
|
$ |
15,000,000 |
|
|
|
6.145%(1)
|
|
February
2017
|
(1)
|
The
mortgage loan is a floating rate loan that bears an interest rate based on
LIBOR plus 2.85%. Simultaneously with the closing of the mortgage
loan the Company entered into a swap agreement which converts the rate we
will pay on the mortgage loan to a fixed rate of 6.145% for the term of
the loan.
|
Bridgestone
Firestone II
We
acquired 12 Bridgestone Firestone properties in three separate transactions, on
February 26, 2010 (2 locations), March 15, 2010 (4 locations) and March 31, 2010
(6 locations) for $26.41 million, inclusive of all closing costs and fees (the
BSFS II Portfolio). The BSFS II Portfolio consists of 12 recently
constructed Bridgestone Firestone retail facilities. The properties
contain an aggregate of 93,581 square feet and are located in Albuquerque, NM,
Rockwell, TX Weatherford, TX, League City, TX, Crowley, TX, Allen, TX Pearland,
TX, Austin, TX, Grand Junction, CO, Benton, AR, Wichita, KS and Baton Rouge,
LA. The BSFS II Portfolio properties are 100% double net leased to
Bridgestone Retail Operations, LLC, a wholly owned subsidiary of the Bridgestone
Corporation (S&P: BBB+). The stores operate as Firestone
Complete Auto Care. The primary lease term under this net lease
arrangement, pursuant to which BSFS will be required to pay all operating
expenses and capital expenditures in addition to base rent, is 15 years, with a
remaining lease term of approximately 13.5 years as of July 16, 2010. The
leases contain contractual rental escalations of 6.25% every five years, and
provide for 5 renewal options of 5 years each. The leases are double net
whereby Bridgestone Operations, LLC is required to pay substantially all
operating expenses, with the exception of costs to maintain and repair the roof
and structure of the building. The average annual base rent on a
straight-line basis over the initial lease term is approximately $2.3
million.
The
acquisition of the BSFS II Properties was financed with the proceeds from the
sale of common stock.
Bridgestone
Retail Operations, LLC is a wholly owned subsidiary of Bridgestone Americas,
Inc. It consists of more than 2,200 company-owned vehicle service and tire
locations across the United States, including Firestone Complete Auto Care,
Tires Plus, Expert Tire and Wheel Works store locations. Bridgestone
Americas, Inc. is the U.S. subsidiary of Bridgestone Corporation, which is
headquartered in Tokyo, Japan and the largest tire producer in the world.
Bridgestone Corporation had assets of $30.2 billion and posted net sales of
$27.9 billion for the fiscal year ended December 31, 2009.
Bridgestone
Corporation is a multinational corporation with 179 production facilities in 25
countries and has one of the largest sales networks in the world, selling its
products in over 150 countries. In addition to being the largest tire
producer in the world, Bridgestone Corporation has diversified business segments
offering various services and products including chemical and industrial
products, sporting goods and bicycles.
Jack
in the Box Portfolio
On
February 24, 2010, we acquired 4 recently-constructed restaurants for Jack In
the Box, Inc. (“Jack”) for $8.3 million, inclusive of all closing costs and
fees. The properties contain an aggregate 9,892 square feet of gross leasable
area. The properties are located in Desloge, Missouri, The Dalles, Oregon,
Vancouver, Washington and Corpus Christi, Texas.
The
primary lease term is 20 years, having commenced simultaneous with closing with
a remaining lease term of 19.6 years as of July 15, 2010. The leases contain
contractual rental escalations every 5 years at the lesser of accumulated
Consumer Price Index over the prior 5 year period or 10%. The leases provide for
4 renewal options of 5 years each and are triple-net, whereby Jack is required
to pay substantially all operating expenses, including all costs to maintain and
repair the roof and structure of the building, including the cost of all capital
expenditures in addition to base rent. The average annual base rent for the
initial term is approximately $639,000.
The
purchase price was comprised of a combination of the proceeds from the sale of
the Company’s common stock and proceeds from a first mortgage loan. The Company
has secured a 5 year mortgage from Wells Fargo Bank, N.A. The following table
outlines the terms of the debt financing incurred in connection with the
acquisition of the Jack in the Box Portfolio. The loan will be secured by a
mortgage on the properties.
Mortgage Debt Amount
|
|
Rate
|
|
Term
|
$4,394,500
|
|
6.36%
(fixed for term)
|
|
5
Years (matures March
2015)
|
On April
22, 2010, we acquired another recently-constructed restaurant for Jack located
in Houston, Texas, for a purchase price of $1,816,000, inclusive of all closing
costs and fees. The property contains 2,038 square feet of gross leasable
area.
The
property has a primary lease term of 20 years, having commenced simultaneous
with closing with a remaining lease term of 19.6 years as of July 15,
2010. The lease contains a contractual rental escalation every 5 years at
the lesser of accumulated Consumer Price Index over the prior 5 year period or
10%. The lease provides for 4 renewal options of 5 years each and is triple-net,
whereby Jack is required to pay substantially all operating expenses, including
all costs to maintain and repair the roof and structure of the building, and the
cost of all capital expenditures, in addition to base rent. The average
annual base rent for the initial term is approximately $142,000.
We
acquired the property with proceeds from the sale of our common
stock.
On May
10, 2010, we secured a 5 year mortgage from Wells Fargo Bank, N.A. The
following table outlines the terms of the debt financing incurred in connection
with the financing of the property. The loan is secured by a mortgage on
the Jack Property.
Mortgage Debt Amount
|
|
Effective Rate
|
|
Maturity Date
|
$970,760
|
|
|
6.17%
|
|
5
years (matures June
2015)
|
On June
29, 2010, we purchased six restaurants for Jack for $11,462,450, inclusive of
all closing costs and fees. The properties contain an aggregate 14,975 square
feet of gross leasable area. The properties are located in South Houston, TX,
Victoria, TX, Beaumont, TX, Ferris, TX and Forney, TX.
The
primary lease term is 20 years, having commenced simultaneous with closing. The
leases contain contractual rental escalations every 5 years at the lesser of
accumulated Consumer Price Index over the prior 5 year period with a maximum
increase of 10%. The leases provide for 4 renewal options of 5 years each
and are triple-net, whereby Jack is required to pay substantially all operating
expenses, including all costs to maintain and repair the roof and structure of
the building, including the cost of all capital expenditures in addition to base
rent. The average annual base rent for the initial term is approximately
$892,000.
Jared
the Galleria of Jewelry Property Portfolio
On May 6,
2010, we acquired three build-to-suit properties (the “Jared Properties”) for
Jared the Galleria of Jewelry (“Jared”) for $5,474,083, inclusive of all closing
costs and fees. The Jared Properties contain 19,543 square feet of gross
leasable area and are located in Amherst, New York, Lake Grove, New York and
Watchung, New Jersey.
The
original leases at commencement were 20 years with an average of 18.6 years
currently remaining as of July 16, 2010. The leases provides for 4 renewal
options of 5 years each and are triple-net, whereby Jared is required to pay
substantially all operating expenses, including all costs to maintain and repair
the roof and structure of the building, and the cost of all capital
expenditures, in addition to base rent. The average annual base rent for
the initial term is approximately $682,000.
We
acquired the Jared Properties with proceeds from the sale of our common
stock.
On June
29, 2010, we acquired one build-to-suit property from Jared for $1,641,489,
inclusive of all closing costs and fees. The property contains 6,157
square feet of gross leasable area and is located in Plymouth, New
York.
The
original lease at commencement was 20 years and four months with 16.6 years
currently remaining as of July 16, 2010. The leases provides for 4 renewal
options of 5 years each and are triple net whereby Jared is required to pay
substantially all operating expenses, including all costs to maintain and repair
the roof and structure of the building, and the cost of all capital
expenditures, in addition to base rent. The average annual base rent for
the initial term is approximately $209,000.
We
acquired the property with proceeds from the sale of our common stock. We
may finance the acquisition post closing, however, there is no guarantee that we
will be able to obtain financing on terms that we believe are favorable or at
all.
Jared the
Galleria of Jewelry is a division of Sterling Jewelers Inc., a wholly owned
subsidiary of Signet Jewelers Limited (Signet Group plc prior to September 2008,
NYSE: SIG, LSE: SIG), the world’s largest specialty retail jeweler. Jared
stores are free standing single point destinations. The stores retain a
large selection of loose diamonds, and sell a number of exclusive ranges such as
the Leo Diamond, the Leo Artisan, and the Peerless. All stores offer a
large selection of prestige Swiss watch brands including Omega, Tag Heuer,
MontBlanc, Movado, Baume & Mercier, Raymond Weil, Tissot, and Swiss
Army. Several locations are also authorized Rolex dealers.
Walgreens
Portfolio
On May
17, 2010, we acquired a build-to-suit, freestanding, fee-simple pharmacy for
Walgreen Co. (“Walgreens) located in Byram, Mississippi for $5,687,000,
inclusive of all closing costs and fees. The property contains 14,820
square feet of gross leaseable area. We previously purchased a Walgreens
pharmacy in Sealey, Texas in July 2009.
The
original lease term at commencement was 25 years with 22.7 years currently
remaining as of July 16, 2010. The lease does not contain rental
escalations during the primary term, consistent with all newer Walgreen
leases. The lease is triple net whereby Walgreens is required to pay
substantially all operating expenses, including all costs to maintain and repair
the roof and structure of the building, and the cost of all capital
expenditures, in addition to base rent. The average annual base rent for
the initial term is $453,000.
We
acquired the property with proceeds from the sale of our common stock. We
have financed the acquisition post closing with a $3.0 million first mortgage
from Loews Corporation, LLC (Continental Casualty Company), at an interest rate
of 5.5%.
On June
30, 2010, we acquired a build-to-suit, freestanding, fee-simple pharmacy for
Walgreens located in LeRoy, New York for $5,068,958, inclusive of all closing
costs and fees. The Walgreens Property contains 13,386 square feet of
gross leaseable area.
The
original lease term at commencement was 25 years with 23.8 years currently
remaining as of July 15, 2010. The lease does not contain rental
escalations during the primary term, consistent with all newer Walgreen
leases. The lease is triple net whereby Walgreens is required to pay
substantially all operating expenses, including all costs to maintain and repair
the roof and structure of the building, and the cost of all capital
expenditures, in addition to base rent. The average annual base rent for
the initial term is $385,000.
We
acquired the property with proceeds from the sale of our common stock. We
may finance the acquisition post closing, however, there is no guarantee that we
will be able to obtain financing on terms that we believe are favorable or at
all.
Walgreen
Co. (NYSE: WAG) was founded in 1901 and is the nation’s largest drugstore chain
based on sales. As of February 29, 2010, Walgreens operated 7,680
locations in 49 states, Washington D.C., Puerto Rico and Guam. The company
has approximately 311,000 employees. Prescription sales account for about
65% of Walgreens total sales, with nearly all payments made directly by
third-parties such as managed care organizations and government and private
insurance companies. Approximately 5.3 million shoppers visit a Walgreens
store daily.
International
House of Pancakes Portfolio
On May
21, 2010, we acquired a build-to-suit, freestanding, fee-simple restaurant for
International House of Pancakes (“IHOP”) located in Hilton Head, South Carolina
for a purchase price of $2,449,000, inclusive of closing costs and fees.
The restaurant contains 5,172 square feet of gross leaseable area. The
tenant of the restaurant is IHOP Properties, Inc. and the lease is guaranteed by
IHOP Corp. (now known as DineEquity, Inc.).
The
original lease term at commencement was 25 years with 15.7 years currently
remaining as of July 16, 2010. The lease contains contractual rental
escalations of 5% every 5 years and provides three renewal options of 5 years
each. The lease is triple net whereby IHOP Properties, Inc. is required to
pay substantially all operating expenses, including all costs to maintain and
repair the roof and structure of the building, and the cost of all capital
expenditures, in addition to base rent. The average annual base rent for
the initial term is approximately $201,000.
We
acquired the IHOP restaurant with proceeds from the sale of our common
stock.
On June
25, 2010, we acquired a build-to-suit, freestanding, fee-simple restaurant for
IHOP located in Buford, Georgia for a purchase price of $2,312,779, inclusive of
closing costs and fees. The restaurant contains 4,139 square feet of gross
leaseable area. The tenant of the restaurant is IHOP Properties, Inc. and
the lease is guaranteed by IHOP Corp. (now known as DineEquity,
Inc.).
The
original lease term at commencement was 20 years with 11.7 years currently
remaining as of July 15, 2010. The lease contains contractual rental
escalations of 10% every 5 years and provides three renewal options of 5 years
each. The lease is triple net whereby IHOP Properties, Inc. is required to
pay substantially all operating expenses, including all costs to maintain and
repair the roof and structure of the building, and the cost of all capital
expenditures, in addition to base rent. The average annual base rent for
the initial term is approximately $204,000.
We
acquired the IHOP restaurant with proceeds from the sale of our common
stock. We may finance the acquisition post closing, however, there is no
guarantee that we will be able to obtain financing on terms that we believe are
favorable or at all.
On June
29, 2010, we acquired a build-to-suit, freestanding, fee-simple restaurant for
IHOP located in Cincinnati, Ohio for a purchase price of $3,318,685, inclusive
of closing costs and fees. The restaurant contains 5,111 square feet of
gross leaseable area. The tenant of the restaurant is IHOP Properties,
Inc. and the lease is guaranteed by IHOP Corp. (now known as DineEquity,
Inc.).
The
original lease term at commencement was 25 years with 21.1 years currently
remaining as of July 15, 2010. The lease contains contractual rental
escalations of 10% every 5 years and provides three renewal options of 5 years
each. The lease is triple net whereby IHOP Properties, Inc. is required to
pay substantially all operating expenses, including all costs to maintain and
repair the roof and structure of the building, and the cost of all capital
expenditures, in addition to base rent. The average annual base rent for
the initial term is approximately $303,000.
We
acquired the IHOP restaurant with proceeds from the sale of our common
stock. We may finance the acquisition post closing, however, there is no
guarantee that we will be able to obtain financing on terms that we believe are
favorable or at all.
IHOP was
founded in 1958 in the Los Angeles suburb of Toluca Lake, California and is a
wholly owned subsidiary of DineEquity, Inc. (NYSE: DIN). IHOP restaurants
feature moderately priced, high quality food and beverage items served in an
attractive and comfortable atmosphere. Although IHOP is known for its
pancakes and omelets, other breakfast specialties are popular menu options with
patrons in the early morning hours. IHOP restaurants are open throughout
the day and evening and offer a broad array of lunch, dinner and snack
favorites. As of December 31, 2009, there were 1,456 IHOP restaurants
located in 50 states, Canada, Mexico, Puerto Rico and the U.S. Virgin
Islands.
Super
Stop & Shop Property
On June
4, 2010, we acquired a free standing, fee simple supermarket for a Super Stop
& Shop (the “Stop & Shop Property”) in Nanuet, New York for $23,807,000,
inclusive of all closing costs and fees. The Stop & Shop Property
contains 59,032 square feet of gross leasable area. The tenant of the Stop
& Shop Property is The Stop & Shop Supermarket Company ( “Stop &
Shop,” formerly known as “Stop & Shop, Inc.”), successor in interest to
Shaw’s Supermarket, Inc. The lease is guaranteed by J. Sainsbury, plc and
Koninklijke Ahold N.V. (S&P: BBB).
The
original lease term at commencement was 25.5 years with 12.6 years currently
remaining as of July 15, 2010. The lease contains contractual rental
escalations of approximately 7.5% every 5 years and provides two renewal options
of 10 years and 1 option of 4 years 3 months. The lease is triple net
whereby Stop & Shop is required to pay substantially all operating expenses,
including all costs to maintain and repair the roof and structure of the
building, and the cost of all capital expenditures, in addition to base
rent. The average annual base rent on a straight line basis for the
initial term is approximately $1,946,000.
Stop
& Shop operates over 375 stores throughout the following 6 states:
Massachusetts, Rhode Island, Connecticut, New Hampshire, New York, and New
Jersey. The supermarket chain employs 59,000 associates from the
communities where the stores are located. Stop & Shop was founded in 1914 in
Somerville, Massachusetts by the Rabinowitz family as the Economy Grocery Stores
Company. By 1947, Economy Grocery Stores had grown into a chain of 86
supermarkets and the name of the company was changed to Stop & Shop,
Inc. In 1996, Koninklijke Ahold N.V. (“Royal Ahold”) acquired Stop &
Shop, Inc. Royal Ahold is a public limited liability company registered in
the Netherlands and listed on Euronext’s Amsterdam Stock Exchange. Royal
Ahold is is one of the largest, international food retailing groups in the world
operating leading supermarket companies in Europe and the United
States.
We
acquired the Stop & Shop Property with proceeds from the sale of our common
stock. We have financed the acquisition post-closing with a $10.8 million
five year first mortgage loan from Ladder Capital at an interest rate of
5.25%.
Tractor
Supply Property
On July
1, 2010, we acquired a build-to-suit, freestanding, fee-simple retail property
located in DuBois, PA for $2,846,000, inclusive of all closing costs and
fees. The property contains 19,097 square feet of gross leaseable
area.
The
original lease term at commencement was 15 years with 14.8 years currently
remaining. The lease contains rental escalations of 10% every five years
during the primary term, and contains three renewal options of five years each.
The lease is triple net whereby Tractor Supply is required to pay substantially
all operating expenses, including all costs to maintain and repair the roof and
structure of the building, and the cost of all capital expenditures, in addition
to base rent. The average annual base rent for the initial term is
$248,000.
We
acquired the property with proceeds from the sale of our common
stock.
Dollar
General Property
On July
15, 2010, we acquired a build-to-suit, freestanding, fee-simple retail property
located in Jacksonville, FL for $1,228,000, inclusive of all closing costs and
fees. The property contains 8,988 square feet of gross leaseable
area.
The
original lease term at commencement was 15 years with 14.5 years currently
remaining. The lease does not contain rental escalations during the
primary term, but contains four renewal options of five years each. The lease is
triple net whereby Dollar General is required to pay substantially all operating
expenses, including all costs to maintain and repair the roof and structure of
the building, and the cost of all capital expenditures, in addition to base
rent. The average annual base rent for the initial term is
$118,000.
We
acquired the property with proceeds from the sale of our common
stock.
As of the
date of this prospectus and other than the acquisitions described above and in
the section entitled “Potential Property Investments,” we have not acquired or
contracted to acquire any specific real properties or mortgage loans.
American Realty Capital Advisors, LLC our advisor, is continually evaluating
various potential property investments and engaging in discussions and
negotiations with sellers, developers and potential tenants regarding the
purchase and development of properties for us and other American Realty
Capital-sponsored programs. At such time while this offering is pending,
if we believe that a reasonable probability exists that we will acquire a
specific property, this prospectus will be supplemented to disclose the
negotiations and pending acquisition of such property. We expect that this
will normally occur upon the signing of a purchase agreement for the acquisition
of a specific property, but may occur before or after such signing or upon the
satisfaction or expiration of major contingencies in any such purchase
agreement, depending on the particular circumstances surrounding each potential
investment. A supplement to this prospectus will describe any improvements
proposed to be constructed thereon and other information that we consider
appropriate for an understanding of the transaction. Further data will be
made available after any pending acquisition is consummated, also by means of a
supplement to this prospectus, if appropriate. YOU SHOULD UNDERSTAND THAT
THE DISCLOSURE OF ANY PROPOSED ACQUISITION CANNOT BE RELIED UPON AS AN ASSURANCE
THAT WE WILL ULTIMATELY CONSUMMATE SUCH ACQUISITION OR THAT THE INFORMATION
PROVIDED CONCERNING THE PROPOSED ACQUISITION WILL NOT CHANGE BETWEEN THE DATE OF
THE SUPPLEMENT AND ANY ACTUAL PURCHASE.
We intend
to obtain adequate insurance coverage for all properties in which we
invest.
Potential
Property Investments
The
acquisition of each such property is subject to a number of conditions. A
significant condition to acquiring any one of these potential acquisitions is
our ability to raise sufficient proceeds in this offering to pay a portion of
the purchase price. An additional condition to acquiring these properties
will be our securing debt financing to pay the balance of the purchase
price. Such financing may not be available on acceptable terms or at
all.
Our
evaluation of a property as a potential acquisition, including the appropriate
purchase price, will include our consideration of a property condition report;
unit-level store performance; property location, visibility and access; age of
the property, physical condition and curb appeal; neighboring property uses;
local market conditions, including vacancy rates; area demographics, including
trade area population and average household income; neighborhood growth patterns
and economic conditions; and the presence of demand generators.
We will
decide whether to acquire properties generally based upon:
|
·
|
satisfaction
of the conditions to the acquisitions contained in the respective
contracts;
|
|
·
|
no
material adverse change occurring relating to the properties, the tenants
or in the local economic
conditions;
|
|
·
|
our
receipt of sufficient net proceeds from the offering of our common stock
to the public and financing proceeds to make these acquisitions;
and
|
|
·
|
our
receipt of satisfactory due diligence information including appraisals,
environmental reports and tenant and lease
information.
|
Our
advisor has identified the properties described below as potential suitable
investments for us. The acquisition of the properties is subject to a
number of conditions. A significant condition to acquiring the potential
acquisition is our ability to raise sufficient proceeds in this offering to pay
all or a portion of the purchase price.
Other
Policies
Subject
to applicable law, our board of directors has the authority, without further
stockholder approval, to issue additional authorized common stock and/or
preferred stock or otherwise raise capital in any manner and on the terms and
for the consideration it deems appropriate, including in exchange for property
and/or as consideration for acquisitions. Existing stockholders will have
no preemptive right to additional shares issued in any future offering or other
issuance of our capital stock, and any offering or issuance may cause a dilution
of your investment. In addition, preferred shares could have distribution,
voting, liquidation and other rights and preferences that are senior to those of
our common shares. See “Description of Shares.” We may in the future issue
common stock or preferred stock in connection with acquisitions, including
issuing common stock or preferred stock in exchange for property. We also
may issue units of partnership interest in our operating partnership in
connection with acquisitions of property or other assets or
entities.
PLAN
OF OPERATION
Certain
statements contained in this “Plan of Operation” and elsewhere in this
prospectus constitute “forward-looking statements.” Such statements include, in
particular, statements about our plans, strategies and prospects, as well as
information about our business and industry. These forward-looking
statements are not historical facts but our current intent, belief or
expectations of our business and industry. You can generally identify
forward-looking statements by our use of forward-looking terminology, such as
“may,” “will,” “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,”
“estimate,” “would,” “could,” “should” and variations of these words and similar
expressions. You should not rely on our forward-looking statements because
the matters they describe are subject to known and unknown risks, uncertainties
and other unpredictable factors, many of which are beyond our
control.
These
forward-looking statements are subject to various risks and uncertainties,
including those discussed above under “Risk Factors,” which could cause our
actual results to differ materially from those projected in any forward-looking
statement we make. We do not undertake to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. You should read the following discussion along with
our financial statements and the related notes included in this
prospectus.
General
All
subscription payments for shares of our common stock sold under the initial
offering and the follow-on offering are released to us as investors are released
to us as stockholders and applied to investments in properties and other assets
and the payment or reimbursement of selling commissions and other organization
and offering expenses. See “Estimated Use of Proceeds.” We will experience
a relative increase in liquidity as additional subscriptions for shares are
received and a relative decrease in liquidity as net offering proceeds are
expended in connection with the acquisition, development and operation of
properties.
Other
than as disclosed in the “Investment Objectives and Policies” section herein, we
have not entered into any arrangements to acquire any specific properties with
the net proceeds from this offering. The number of properties we may
acquire will depend upon the number of shares sold and the resulting amount of
the net proceeds available for investment in properties.
Our
advisor also may, but will not be required to, establish reserves from gross
offering proceeds, out of cash flow generated by operating properties or out of
non-liquidating net sale proceeds from the sale of our properties. Working
capital reserves are typically utilized for non-operating expenses such as
tenant improvements, leasing commissions and major capital expenditures.
Alternatively, a lender may require its own formula for escrow of working
capital reserves.
The net
proceeds of this offering will provide funds to enable us to purchase
properties. We may acquire properties free and clear of permanent mortgage
indebtedness by paying the entire purchase price of each property in cash or for
equity securities, or a combination thereof, or we may selectively encumber all
or certain properties, if favorable financing terms are available, following
acquisition. The proceeds from such loans will be used to acquire
additional properties or increase cash flow. In addition, we intend to
borrow funds to purchase properties. In the event that this offering is
not fully sold, our ability to diversify our investments may be
diminished.
We made
an election under Section 856(c) of the Internal Revenue Code to be taxed as a
REIT under the Internal Revenue Code, in the taxable year ended December 31,
2008. As a REIT, we generally will not be subject to U.S. federal income
tax on income that we distribute to our stockholders. If we fail to
qualify as a REIT in any taxable year, we will be subject to U.S. federal income
tax on our taxable income at regular corporate rates and will not be permitted
to qualify for treatment as a REIT for U.S. federal income tax purposes for four
years following the year in which our qualification is denied. Such an
event could materially and adversely affect our net income. However, we
believe that we are organized and operate in a manner that enables us to qualify
for treatment as a REIT for U.S. federal income tax purposes during the years
ending December 31, 2009, and we intend to continue to operate so as to remain
qualified as a REIT for U.S. federal income tax purposes.
We will
monitor the various qualification tests that we must meet to maintain our status
as a REIT. Ownership of our shares will be monitored to ensure that no
more than 50.0% in value of our outstanding shares is owned, directly or
indirectly, by five or fewer individuals at any time after the first taxable
year for which we make an election to be taxed as a REIT. We will also
determine, on a quarterly basis, that the gross income, asset and distribution
tests as described in the section of this prospectus entitled “Material U.S.
Federal Income Tax Considerations — Requirements for Qualification” are
met.
Liquidity
and Capital Resources
On a
long-term basis, our principal demands for funds will be for property
acquisitions, either directly or through investment interests, for the payment
of operating expenses and distributions, and for the payment of interest on our
outstanding indebtedness and other investments. Generally, cash needs for
items other than property acquisitions will be met from operations and property
acquisitions from funding by public offerings of our shares. However,
there may be a delay between the sale of our shares and our purchase of
properties that could result in a delay in the benefits to our stockholders, if
any, of returns generated from our investment operations. Our advisor will
evaluate potential additional property acquisitions and engage in negotiations
with sellers on our behalf. Investors should be aware that after a
purchase contract is executed that contains specific terms, the property will
not be purchased until the successful completion of due diligence, which
includes review of the title insurance commitment, an appraisal and an
environmental analysis. In some instances, the proposed acquisition will
require the negotiation of final binding agreements, which may include financing
documents. During this period, we may decide to temporarily invest any
unused proceeds from the offering in certain investments that could yield lower
returns than the properties. These lower returns may affect our ability to
make distributions.
Our board
of directors will determine the amount and timing of distributions to our
stockholders and will base such determination on a number of factors, including
funds legally available for payment of distributions, financial condition,
capital expenditure requirements and annual distribution requirements needed to
maintain our status as a REIT under the Internal Revenue Code.
Potential
future sources of capital include proceeds from this offering, proceeds from
secured or unsecured financings from banks or other lenders, proceeds from the
sale of properties and undistributed funds from operations. If necessary,
we may use financings or other sources of capital in the event of unforeseen
significant capital expenditures. Currently, we do not have a credit
facility or other third party source of liquidity. To the extent we do not
secure a credit facility or other third party source of liquidity, we will be
dependent upon the proceeds of this offering and income from operations in order
to meet our long term liquidity requirements and to fund our
distributions.
Results
of Operations
We
commenced our initial public offering of 150,000,000 shares of common stock on
January 25, 2008, which we refer to as the initial offering. As of July
27, 2010, we had issued 33,045,410 shares of common stock. Total gross
proceeds from these issuances were $328.7 million. As of July 27, 2010,
the aggregate value of all share issuances and subscriptions outstanding was
$330.2 million based on a per share value of $10.00 (or $9.50 per share for
shares issued under the DRIP). We will offer these shares until January
25, 2011, provided that the offering will be terminated if all of the shares are
sold before then. As of July 27, 2010, there were approximately
116,955,000 shares of our common stock outstanding, excluding shares available
under the distribution reinvestment plan from the initial offering. We
have invested in 30 property portfolios with 169 total properties. Our
management is not aware of any material trends or uncertainties (other than (a)
national economic conditions affecting real estate generally (such as lower
capitalization rates, which lead to lower rents), and the trend toward
sale-leaseback arrangements, which places more properties on the market), and
(b) the recent dislocations in the debt markets that will reduce the amount of
capital that will be available to finance real estate, which, in turn, (i) will
no longer allow real estate investors to rely on capitalization rate compression
to generate returns and (ii) has slowed real estate transaction activity) that
may reasonably be expected to have a material impact, favorable or unfavorable,
on revenues or income from the acquisition and operations of real properties and
mortgage loans, other than those referred to in this prospectus. Investors
will need to focus on market-specific growth dynamics, operating performance,
asset management and the long term quality of the underlying real estate.
Our Sponsors have an established track record identifying attractive
risk-adjusted investment opportunities and executing value creation strategies
across different market cycles.
We
anticipate that current disruptions in the real estate capital markets,
resulting from heavy losses in sub-prime mortgages, will lead to improved
fundamentals across the entire real estate market, especially in the commercial
single-tenant real estate space, where we are active. These are opportune
times for acquirers of properties such as us. While many real estate
speculators view the recent market correction unfavorably, because it has
brought the real estate capitalization (cap rate compression) to a
halt, we believe that we are seeing a new more disciplined transactional
environment in which better underwriting, lower prices and appropriate leverage
levels give rise to greater predictability and lower market
volatility.
We
believe the current state of the real estate capital markets provides an
excellent opportunity for value-oriented investors such as us, looking to
purchase attractively priced real estate with appropriate risk adjusted debt
terms. The universe of buyers has shrunk as the debt crisis widened,
marginalizing speculators and overleveraged purchasers, resulting in lower
demand and downward pressure on prices. We anticipate this will continue
as real estate market movers transact at lower prices and increase their market
share. Lenders are looking for well capitalized and appropriately
leveraged transactions such as ours. A combination of these two movements
will continue improving the value proposition and in turn providing our
investors with a competitive risk adjusted return.
The
credit crunch resulted in mortgage lenders tightening their belts as they return
to real estate fundamentals in search of guidance to help structure loans.
Lenders are more closely underwriting real estate deals, scrutinizing tenant
credit, the actual real estate, vacancy and absorption rates. This is
resulting in lower leverage loans at higher interest rates and more
amortization. The slowing of financing available to real estate purchasers
has resulted in less transactions occurring and fewer sales, which in turn has
caused cap rates to expand and real estate prices inching back down to the
historical levels of a few years ago.
Inflation
The real
estate market has not been affected significantly by inflation in the past
several years due to the relatively low inflation rate. However, in the
event inflation does become a factor, our leases typically do not include
provisions that would protect us from the impact of inflation.
SELECTED
FINANCIAL DATA
As of
July 27, 2010 there were 33,045,410 shares of our common stock
outstanding.
The
selected financial data presented below has been derived from our consolidated
financial statements as of the periods indicated:
Balance sheet data (amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
real estate investments, at cost
|
|
$ |
419,994 |
|
|
$ |
338,556 |
|
|
$ |
164,770 |
|
|
$ |
— |
|
Total
assets
|
|
|
417,239 |
|
|
|
339,277 |
|
|
|
164,942 |
|
|
|
938 |
|
Mortgage
notes payable
|
|
|
225,118 |
|
|
|
183,811 |
|
|
|
112,742 |
|
|
|
— |
|
Total
short-term equity
|
|
|
0 |
|
|
|
15,878 |
|
|
|
30,926 |
|
|
|
— |
|
Other
notes payable
|
|
|
13,000 |
|
|
|
13,000 |
|
|
|
1,090 |
|
|
|
— |
|
Intangible
lease obligation, net
|
|
|
9,006 |
|
|
|
9,085 |
|
|
|
9,400 |
|
|
|
— |
|
Total
liabilities
|
|
|
254,736 |
|
|
|
228,721 |
|
|
|
163,183 |
|
|
|
738 |
|
Total
stockholders’ equity
|
|
|
162,503 |
|
|
|
110,556 |
|
|
|
1,759 |
|
|
|
200 |
|
Operating data (amounts in
thousands except per share data)
|
|
Three Months
Ended
March 31, 2010
|
|
|
Year Ended
December 31,
2009
|
|
|
Year Ended
December 31,
2008
|
|
|
For the
Period
from August
17,
2007 (date of
inception) to
December 31,
2007
|
|
Total
revenue
|
|
$ |
7,428 |
|
|
$ |
14,964 |
|
|
$ |
5,546 |
|
|
$ |
— |
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
management fees to affiliate
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
Asset
management fees to affiliate
|
|
|
— |
|
|
|
145 |
|
|
|
— |
|
|
|
— |
|
Acquisition
and transaction related costs
|
|
|
341 |
|
|
|
506 |
|
|
|
— |
|
|
|
— |
|
General
and administrative
|
|
|
224 |
|
|
|
507 |
|
|
|
380 |
|
|
|
1 |
|
Depreciation
and amortization
|
|
|
3,785 |
|
|
|
8,315 |
|
|
|
3,056 |
|
|
|
— |
|
Total
operating expenses
|
|
|
4,350 |
|
|
|
9,473 |
|
|
|
3,440 |
|
|
|
1 |
|
Operating
income (loss)
|
|
|
3,078 |
|
|
|
5,491 |
|
|
|
2,106 |
|
|
|
(1 |
) |
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,673 |
) |
|
|
(10,353 |
) |
|
|
(4,774 |
) |
|
|
— |
|
Interest
income
|
|
|
11 |
|
|
|
52 |
|
|
|
3 |
|
|
|
— |
|
Gains
on sales to noncontrolling interest holders, net
|
|
|
335 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gains
(losses) on derivative instruments
|
|
|
(152 |
) |
|
|
495 |
|
|
|
(1,618 |
) |
|
|
— |
|
Total
other expenses
|
|
|
3,479 |
|
|
|
(9,805 |
) |
|
|
(6,389 |
) |
|
|
— |
|
Net
loss
|
|
$ |
(401 |
) |
|
$ |
(4,315 |
) |
|
$ |
(4,283 |
) |
|
$ |
(1 |
) |
Other
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified
funds from
operations (1)
(2)
|
|
$ |
3,314 |
|
|
$ |
3,460 |
|
|
$ |
477 |
|
|
$ |
— |
|
Cash
flows provided by (used in) operations
|
|
|
2,060 |
|
|
|
(2,526 |
) |
|
|
4,013 |
|
|
|
(200 |
) |
Cash
flows used in investing activities
|
|
|
(81,438 |
) |
|
|
(173,786 |
) |
|
|
(97,456 |
) |
|
|
— |
|
Cash
flows provided by financing activities
|
|
|
77,146 |
|
|
|
180,435 |
|
|
|
94,330 |
|
|
|
200 |
|
Per
share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share – basic and diluted
|
|
$ |
(0.02 |
) |
|
$ |
(0.74 |
) |
|
$ |
(6.02 |
) |
|
$ |
— |
|
Distributions
declared
|
|
$ |
.70 |
|
|
$ |
.67 |
|
|
$ |
.65 |
|
|
$ |
— |
|
Weighted-average
number of common shares outstanding, basic and diluted
|
|
|
17,845,489 |
|
|
|
5,768,761 |
|
|
|
711,524 |
|
|
|
— |
|
|
(3)
|
We
consider funds from operations (“FFO”) and modified funds from operations
(“MFFO”) a useful indicator of the performance of a REIT. Because FFO
calculations exclude such factors as depreciation and amortization of real
estate assets and gains or losses from sales of operating real estate
assets (which can vary among owners of identical assets in similar
conditions based on historical cost accounting and useful-life estimates),
they facilitate comparisons of operating performance between periods and
between other REITs in our peer group. Accounting for real estate assets
in accordance with GAAP implicitly assumes that the value of real estate
assets diminishes predictability over time. Since real estate values have
historically risen or fallen with market conditions, many industry
investors and analysts have considered the presentation of operating
results for real estate companies that use historical cost accounting to
be insufficient by themselves. As a result, we believe that the use of FFO
and MFFO, together with the required GAAP presentations, provide a more
complete understanding of our performance relative to our peers and a more
informed and appropriate basis on which to make decisions involving
operating, financing, and investing activities. Other REITs may not define
FFO and MFFO in accordance with the current National Association of Real
Estate Investment Trust’s (“NAREIT”) definition (as we do) or may
interpret the current NAREIT definition differently than we do.
Consequently, our presentation of FFO and MFFO may not be comparable to
other similarly titled measures presented by other
REITs.
|
|
(4)
|
The
FFO and MFFO measurement is applicable for the nine months ended December
31, 2008.
|
For
additional information, including financial statements, please see our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the
SEC on March 18, 2010 and Quarterly Report on Form 10-Q for the period ended
March 31, 2010, filed with the SEC on May 7, 2010.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND OPERATIONS
Overview
We were
formed on August 16, 2007 to acquire and operate commercial real estate
primarily consisting of high quality, freestanding, single-tenant properties net
leased to investment grade and other creditworthy tenants located throughout the
United States and Commonwealth of Puerto Rico.
We are a
Maryland corporation that elected to be taxed as a real estate investment trust,
or REIT, beginning with the taxable year ended December 31, 2008. On
September 10, 2007, we filed our Registration Statement with the SEC to offer a
minimum of 750,000 shares and a maximum of 150,000,000 shares of common stock
for sale to the public. The SEC declared the registration statement
effective on January 25, 2008, at which time we launched our ongoing initial
public offering and then commenced our real estate operations. As of March
31, 2010, we issued 20,558,974 shares of common stock, including 339,077 shares
issued in connection with an acquisition in March 2008. Total gross
proceeds from these issuances were $203.2 million. As of March 31, 2010,
the aggregate value of all share issuances and subscriptions outstanding was
$205.4 million based on a per share value of $10.00 (or $9.50 for shares issued
under the initial offering’s distribution reinvestment plan, or DRIP). As
of June 30, 2010, 242,505 shares of common stock had been redeemed (including
shares approved for redemption as of June 30, 2010) under our stock repurchase
program at a value of $849 thousand. We are dependent upon the net
proceeds from the offering to conduct our proposed operations.
We intend
to use the proceeds of our ongoing initial public offering to acquire and manage
a diverse portfolio of real estate properties consisting primarily of
freestanding, single-tenant properties net leased to investment grade and other
creditworthy tenants throughout the United States and Puerto Rico. We plan
to own substantially all of our assets and conduct our operations through our
operating partnership, of which we are the sole general partner. We have
no paid employees. Our advisor conducts our operations and manages our
portfolio real estate investments.
We intend
to continue our strategy of acquiring freestanding, single tenant properties
through sale-leaseback and marketed transactions with in-place leases that have
a minimum of ten years remaining under the primary term. Such leases
generally include renewal options. We typically fund our acquisitions with
a combination of equity and debt and in certain cases we may use only equity
capital or we may fund a portion of the purchase price of an acquisition through
investments from third parties. We expect to arrange long-term financing
on both a secured and unsecured fixed rate basis. We intend to continue to
grow our existing relationships and develop new relationships throughout various
markets we serve, which we expect will lead to further acquisition
opportunities. We intend to have an overall leverage ratio as it relates
to long-term secured mortgage financings of approximately 55%. As of March
31, 2010 our leverage ratio was 54.8%. We generally arrange for our
mortgage note agreements to include monthly principal payments together with
interest. This amortization results in lowering our overall mortgage notes
balance on a continuous basis.
As of
March 31, 2010, we owned 146 properties compromising 2.6 million square feet,
100% leased with a weighted average remaining lease term of 16 years. In
constructing our portfolio, we are committed to diversification (industry,
tenant and geography). As of March 31, 2010, rental revenues derived from
investment grade tenants (rated BBB+ or better by Standards & Poor)
approximately 90%. Our strategy encompasses receiving the majority of our
revenue from investment grade tenants as we further acquire properties and enter
into (or assume long-term lease arrangements.
Real
estate-related investments are higher-yield and higher risk investments that our
advisor will actively manage, if we elect to acquire such investments. The
real estate-related investments in which we may invest include: (i) mortgage
loans; (ii) equity securities such as common stocks, preferred stocks and
convertible preferred securities of real estate companies; (iii) debt
securities, such as mortgage-backed securities, commercial mortgages, mortgage
loan participations and debt securities issued by other real estate companies;
and (iv) certain types of illiquid securities, such as mezzanine loans and
bridge loans. While we may invest in any of these real estate-related
investments, our Advisor, with the support of our Board of Trustees, has elected
to suspend all activities relating to acquiring real estate-related investments
for an indefinite period based on the current adverse climate affecting the
capital markets. Since our inception, we have not acquired any real
estate-related investments.
We may be
considered a “blind pool” because, other than as described in the “Investment
Objectives and Policies” section, we have not identified future investments we
will make with proceeds from this offering.
We have
no paid employees and are externally advised and managed by American Realty
Capital Advisors, LLC, an affiliate of ours.
Recent
Market Conditions
The
current mortgage lending and interest rate environment for real estate continues
to be disrupted and overall economic conditions remain uncertain. Domestic
and international financial markets experienced significant disruptions that
were brought about in large part by challenges in the world-wide banking
system. These disruptions have severely impacted the availability of
credit and have contributed to rising costs associated with obtaining
credit. We have and expect to continue to experience stringent lending
criteria, which may affect our ability to finance certain property
acquisitions. Additionally, for properties for which we are able to obtain
acquisition financing, the interest rates on such loans may be
unacceptable. We have and expect to continue to manage the current
mortgage lending environment by utilizing fixed rate loans if the terms are
acceptable, short-term variable rate loans, assuming existing mortgage loans in
connection with property acquisitions, or entering into interest rate lock or
swap agreements, or any combination of the foregoing. We have and expect
to continue to acquire properties for cash without financing, which will reduce
the number of properties we can purchase, and the return on the properties we do
purchase may be lower. If we are unable to obtain suitable financing for
future acquisitions or we are unable to identify suitable properties at
appropriate prices in the current credit environment, we may have a large amount
of uninvested cash, which may adversely affect our results of operations.
All of these events would have a material adverse effect on our results of
operations, financial condition and ability to pay distributions and redeem
shares.
The
current economic environment has lead to higher unemployment and a decline in
consumer spending. These economic trends have adversely impacted the
retail and real estate markets causing higher tenant vacancies, declining rental
rates, and declining property values. As of March 31, 2010, 100% of our
rentable square feet were under lease. However, if current economic
conditions persist, we may experience vacancies or be required to reduce rents
on occupied space. If we do experience vacancies, our advisor will
actively seek to lease our vacant space; however, as retailers and other tenants
have been delaying or eliminating their store expansion plans, the amount of
time required to re-tenant a property has been increasing.
Application
of Critical Accounting Policies
Our
accounting policies have been established to conform with GAAP. The
preparation of financial statements in conformity with GAAP requires management
to use judgment in the application of accounting policies, including making
estimates and assumptions. These judgments affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. If management’s judgment or
interpretation of the facts and circumstances relating to various transactions
had been different, it is possible that different accounting policies would have
been applied, thus, resulting in a different presentation of the financial
statements. Additionally, other companies may utilize different estimates
that may impact the comparability of our results of operations to those of
companies in similar businesses.
The
critical accounting policies outlined below will be employed with the
preparation of our financial statements.
Investments
in Real Estate
Investments
in real estate are recorded at cost. Improvements and replacements are
capitalized when they extend the useful life of the asset. Costs of
repairs and maintenance are expensed as incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of up to forty
years for buildings and improvements, five to ten years for fixtures and
improvements and the shorter of the useful life or the remaining lease term for
tenant improvements and leasehold interests.
We are
required to make subjective assessments as to the useful lives of our properties
for purposes of determining the amount of depreciation to record on an annual
basis with respect to our investments in real estate. These assessments
have a direct impact on our net income because if we were to shorten the
expected useful lives of our investments in real estate, we would depreciate
these investments over fewer years, resulting in more depreciation expense and
lower net income on an annual basis.
We are
required to present the operations related to properties that have been sold or
properties that are intended to be sold as discontinued operations in the
statement of operations for all periods presented, Properties that are intended
to be sold are to be designated as “held for sale” on the balance
sheet.
Long-lived
assets are carried at cost and evaluated for impairment when events or changes
in circumstances indicate such evaluation is warranted or when they are
designated as held for sale. Valuation of real estate is considered a
“critical accounting estimate” because the evaluation of impairment and the
determination of fair values involve a number of management assumptions relating
to future economic events that could materially affect the determination of the
ultimate value, and therefore, the carrying amounts of our real estate.
Additionally, decisions regarding when a property should be classified as held
for sale are also highly subjective and require significant management
judgment.
Events or
changes in circumstances that could cause an evaluation for impairment include
the following:
|
·
|
a
significant decrease in the market price of a long-lived
asset;
|
|
·
|
a
significant adverse change in the extent or manner in which a long-lived
asset is being used or in its physical
condition;
|
|
·
|
a
significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset, including an adverse
action or assessment by a
regulator;
|
|
·
|
an
accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset;
and
|
|
·
|
a
current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset.
|
We review
our portfolio on an on-going basis to evaluate the existence of any of the
aforementioned events or changes in circumstances that would require us to test
for recoverability. In general, our review of recoverability is based on
an estimate of the future discounted cash flows, excluding interest charges,
expected to result from the property’s use and eventual disposition. These
estimates consider factors such as expected future operating income, market and
other applicable trends and residual value expected, as well as the effects of
leasing demand, competition and other factors. If impairment exists due to
the inability to recover the carrying value of a property, an impairment loss is
recorded to the extent that the carrying value exceeds the estimated fair value
of the property. We are required to make subjected assessments as to
whether there are impairments in the values of our investments in real
estate. These assessments have a direct impact on our net income because
recording an impairment loss results in an immediate negative adjustment to net
income.
Purchase
Price Allocation
We
allocate the purchase price of acquired properties to tangible and identifiable
intangible assets acquired based on their respective fair values. Tangible
assets include land, buildings, equipment and tenant improvements on an as-if
vacant basis. We utilize various estimates, processes and information to
determine the as-if vacant property value. Estimates of value are made
using customary methods, including data from appraisals, comparable sales,
discounted cash flow analysis and other methods. Identifiable intangible
assets include amounts allocated to acquire leases for above- and below-market
lease rates, the value of in-place leases, and the value of customer
relationships.
Amounts
allocated to land, buildings, equipment and fixtures are based on cost
segregation studies performed by independent third-parties or on our analysis of
comparable properties in our portfolio. Depreciation is computed using the
straight-line method over the estimated lives of forty years for buildings, five
to ten years for building equipment and fixtures, and the short of the useful
life or the remaining lease term for tenant improvements.
Above-market
and below-market in-place leases values for owned properties are recorded based
on the present value (using an interest rate which reflects the risks associated
with the leases acquired) of the difference between the contractual amounts to
be paid pursuant to the in-place leases and management’s estimate of fair market
lease rates for the corresponding in-place leases, measured over a period equal
to the remaining non-cancelable term of the lease. The capitalized
above-market lease values are amortized as a reduction of rental income over the
remaining non-cancelable terms of the respective leases. The capitalized
below-market lease values are amortized as an increase to rental income over the
initial term and any fixed-rate renewal periods in the respective leases.
The aggregate value of intangible assets related to in-place leases is primarily
the difference between the property valued with existing in-place leases
adjusted to market rental rates and the property valued as if vacant.
Factors considered by us in our analysis of the in-place leases intangibles
include an estimate of carrying costs during the expected lease-up period for
each property, taking into account current market conditions and costs to
execute similar leases. In estimating carrying costs, we include real
estate taxes, insurance and other operating expenses and estimates of lost
rentals at market rates during the expected lease-up period, which typically
ranges from six to 18 months. We also estimate costs to execute similar
leases including leasing commissions, legal and other related
expenses.
The
aggregate value of intangible assets related to customer relationship is
measured based on our evaluation of the specific characteristics of each
tenant’s lease and our overall relationship with the tenant.
Characteristics considered by us in determining these values include the nature
and extent of our existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the tenant’s credit
quality and expectations of lease renewals, among other factors.
The value
of in-place leases is amortized to expense over the initial term of the
respective leases, which range primarily from 2 to 20 years. The value of
customer relationship intangibles is amortized to expense over the initial term
and any renewal periods in the respective leases, but in no event does the
amortization period for intangible assets exceed the remaining depreciable life
of the building. If a tenant terminates its lease, the unamortized portion
of the in-place lease value and customer relationship intangibles is charged to
expense.
In making
estimates of fair values for purposes of allocating purchase price, we utilize a
number of sources, including independent appraisals that may be obtained in
connection with the acquisition or financing of the respective property and
other market data. We also consider information obtained about each
property as a result o four pre-acquisition due diligence, as well as subsequent
marketing and leasing activities, in estimating the fair value of the tangible
and intangible assets acquired and intangible liabilities assumed. The
allocations presented in the accompanying consolidated balance sheets are
substantially complete; however, there are certain items that we will finalize
once we receive additional information. Accordingly, these allocations are
subject to revision when final information is available, although we do not
expect future revisions to have a significant impact on our financial position
or results of operations.
Derivative
Instruments
We may
use derivative financial instruments to hedge all or a portion of the interest
rate risk associated with our borrowings. The principal objective of such
agreements is to minimize the risk and/or costs associated with our operating
and financial structure as well as to hedge specific anticipated
transactions.
We record
all derivatives on the balance sheet at fair value. The accounting for
changes in the fair value of derivatives depends on the intended use of the
derivative, whether we have elected to designate a derivative in a hedging
relationship and apply hedge accounting and hedge of the exposure to changes in
the fair value of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value
hedges. Derivatives designated and qualifying as a hedge of the exposure
to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. Derivatives may also be
designated as hedges of the foreign currency exposure of a net investment in a
foreign operation. Hedge accounting generally provides for the matching of
the timing of gain or loss recognition on the hedging instrument with the
recognition of the changes in the fair value of the hedged asset or liability
that is attributable to the hedged risk in a fair value hedge or the earnings
effect of the hedged forecasted transactions in a cash flow hedge. We may
enter into derivative contracts that are intended to economically hedge certain
of its risk, even though hedge accounting does not apply or we elect not to
apply hedge accounting.
Valuation
of Real Estate Assets
We will
continually monitor events and changes in circumstances that could indicate that
the carrying amounts of our real estate and related intangible assets may not be
recoverable. When indicators of potential impairment are present that
indicate that the carrying amounts of real estate and related intangible assets
may not be recoverable, we assess the recoverability of the assets by
determining whether the carrying value of the assets will be recovered through
the undiscounted future operating cash flows expected from the use of the assets
and their eventual disposition. In the event that such expected
undiscounted future cash flows do not exceed the carrying value, we will adjust
the real estate and related intangible assets to the fair value and recognize an
impairment loss.
Projections
of expected future cash flows require us to estimate future market rental income
amounts subsequent to the expiration of current lease agreements, property
operating expenses, discount rates, the number of months it takes to re-lease
the property and the number of years the property is held for investment.
The use of inappropriate assumptions in the future cash flow analysis would
result in an incorrect assessment of the property’s future cash flow and fair
value and could result in the overstatement of the carrying value of our real
estate and related intangible assets and net income.
Our
advisor evaluates potential acquisitions of real estate and real estate related
assets and engages in negotiations with sellers and borrowers on our
behalf. Investors should be aware that after a purchase contract is
executed that contains specific terms the property will not be purchased until
the successful completion of due diligence and negotiation of final binding
agreements. During this period, we may decide to temporarily invest any
unused proceeds from the Offering in certain investments that could yield lower
returns than the properties. These lower returns may affect our ability to
make distributions.
Revenue
Recognition
Our
revenues, which are derived primarily from rental income, include rents that
each tenant pays in accordance with the terms of each lease reported on a
straight-line basis over the initial term of the lease. Since many of our
leases provide for rental increases at specified intervals, straight-line basis
accounting requires us to record a receivable, and include in revenues, unbilled
rent receivables that we will only receive if the tenant makes all rent payments
required through the expiration of the initial term of the lease.
We
continually review receivables related to rent and unbilled rent receivables and
determine collectability by taking into consideration the tenant’s payment
history, the financial condition of the tenant, business conditions in the
industry in which the tenant operates and economic conditions in the area in
which the property is located. In the event that the collectability of a
receivable is in doubt, we record an increase in our allowance for uncollectible
accounts or record a direct write-off of the receivable in our consolidated
statements of operations.
Income
Taxes
Beginning
with the year ended December 31, 2008, we made an election to be taxed as a REIT
under Sections 856 through 860 of the Internal Revenue Code in the taxable year
ending December 31, 2008. As a REIT, we generally will not be subject to
federal corporate income tax to the extent we distribute our REIT taxable income
to our stockholders, and so long as we distribute at least 90% of our REIT
taxable income. REITs are subject to a number of other organizational and
operational requirements. Even if we qualify for taxation as a REIT, we
may be subject to certain state and local taxes on our income and property, and
U.S. federal income and excise taxes on our undistributed income.
Comparison
of Year Ended December 31, 2009 to Year Ended December 31, 2008
As of
December 31, 2009, we owned 126 properties which are 100% leased, compared to 92
properties which were 100% leased at December 31, 2008, an increase of 37.0%.
Accordingly, our results of operations for the year ended December 31, 2009 as
compared to the year ended December 31, 2008 reflect significant increases in
most categories.
Rental
Income
Rental
income increased $9.4 million to $15.0 million for the year ended December 31,
2009, compared to $5.5 million for the year ended December 31, 2008. The
increase in rental income was driven by our acquisition of $173.6 million of net
leased property during 2009 with total square footage of 1.0 million an increase
of 154.6% from the square footage we held at December 31, 2008. These
properties, acquired at an average 8.27% cap rate, are leased from 10 to 25
years primarily to investment grade tenants.
Asset
Management Fees to Affiliate
Our
Advisor is entitled to fees for the management of our properties as well as fees
for purchases and sales of properties. The Advisor has elected to waive all
asset management fees except for $0.1 million for the year ended December
31, 2009 and waived its entire fee for the year ended December 31, 2008. For the
years ended December 31, 2009 and 2008, we would have incurred additional asset
management fees of $1.8 million and $0.7 million, respectively, had they not
been waived.
Property
Management Fees to Affiliate
Our
affiliated Property Manager, has elected to waive the property management fees
for the years ended December 31, 2009 and fees were $4 thousand for the year
ended December 31, 2008 to improve our working capital. Such fees represent
amounts that had they not been waived, would have been paid to our Property
Manager to manage and lease our properties. For the years ended December 31,
2009 and 2008, we would have incurred property management fees of $0.3 million
and $0.1 million, respectively, had the fees not been waived.
Acquisition
and Transaction Related Costs
Beginning
January 1, 2009, costs related to acquisitions of properties are required to be
expensed in the period incurred. Prior to that date acquisition costs were
capitalized and allocated to the fair value of the assets acquired. For the year
ended December 31, 2009 acquisition costs of $0.5 million were required to be
expensed in accordance with new accounting guidance for business
combinations.
General
and Administrative Expenses
General
and administrative expenses increased $0.1 million or 33.4% to $0.5 million for
the year ended December 31, 2009, compared to $0.4 million for the year ended
December 31, 2008. The majority of the general and administrative expenses
for the year ended December 31, 2009 included $0.2 million of amortized
insurance expense relating to our directors’ and officers’ insurance policy,
$0.1 million of board member compensation, $0.1 million of professional fees.
The increase from the year ended December 31, 2008 is mainly due to increases in
professional fees and other expenses to support our larger real estate
portfolio.
Depreciation
and Amortization Expense
Depreciation
and amortization expense increased $5.2 million, or 172.1%, to $8.3 million for
the year ended December 31, 2009, compared to $3.1 million for the year ended
December 31, 2008. The increase in depreciation and amortization expense was the
result of our acquisition of real estate during 2008 and in 2009. These
properties were placed into service when acquired and are being depreciated for
the period held.
Interest
Expense
Interest
expense increased $5.6 million, or 116.8% to $10.4 million for the year ended
December 31, 2009, compared to $4.8 million for the year ended December 31,
2008. The increase in interest expense was the mainly the result of a higher
debt balance due to the financing of a portion of our property acquisitions. The
average first mortgage debt balance for the year ended December 31, 2009 and,
2008 was $136.5 million and $45.3 million, respectively, an increase of 301.3%.
We view these secured financing sources as an efficient and accretive means to
acquire properties.
Our
interest expense in future periods will vary based on our level of future
borrowings, which will depend on the level of proceeds raised in the Offering,
the cost of borrowings, and the opportunity to acquire real estate assets which
meet our investment objectives.
Derivative
Instruments
Included
in other income was a gain in the fair value of derivative instruments of $0.5
million for the year ended December 31, 2009 compared to a loss of $1.6 million
for the year ended December 31, 2008. These losses are related to marking
our derivative instruments to fair value.
For the
period of August 17, 2007 (date of inception) to December 31, 2007 our results
of operations were comprised of general and administrative
expenses.
Funds
from Operations
We
consider funds from operations (“FFO”) a useful indicator of the performance of
a REIT. Because FFO calculations exclude such factors as depreciation and
amortization of real estate assets and gains or losses from sales of operating
real estate assets (which can vary among owners of identical assets in similar
conditions based on historical costs accounting and useful-life estimates), they
facilitate comparisons of operating performance between periods and between
other REITs in our peer group. Accounting for real estate assets in
accordance with GAAP implicitly assumes that the value of real estate assets
diminishes predictability over time. Since real estate values have
historically risen or fallen with market conditions, many industry investors and
analysts have considered the presentation of operating results for real estate
companies that use historical cost accounting to be insufficient by
themselves. As a result, we believe that the use of FFO, together with the
required GAAP presentations, provide a more complete understanding of our
performance relative to our peers and a more informed and appropriate basis on
which to make decisions involving operating, financing, and investing
activities. Other REITs may not define FFO in accordance with the current
National Association of Real Estate Investment Trust’s (“NAREIT”) definition (as
we do) or may interpret the current NAREIT definition differently than we
do. Consequently, our presentation of FFO may not be comparable to other
similarly titled measures presented by other REITs.
We
believe that modified funds from operations (“MFFO”) is helpful to investors as
a measure of operating performance because it excludes charges that management
considers more reflective of investing activities or non-operating valuation
changes. By provided FFO and MFFO, we present information that assists
investors and analysts in aligning their analysis with management’s analysis of
long-term operating activities. We believe fluctuations in MFFO are
indicative of changes in operating activities and provide comparability in
evaluating our performance over time and as compared to other real estate
companies that may not be affected by impairments, write-offs of capitalized
costs or have acquisition activities. As explained below, management’s
evaluation of our operating performance excludes the items considered in the
calculations of MFFO based on the following economic
considerations:
|
·
|
Acquisition-related
costs. In evaluation investments in real estate, management’s
investment models and analysis differentiates costs to acquire the
investment from the operations derived from the investment. Prior to
2009, acquisition costs for these types of investments were capitalized;
however beginning 2009 acquisition costs related to business combinations
are expensed. We believe by excluding expensed acquisition costs,
MFFO provides useful supplemental information that is comparable with
other companies that do not currently engage in acquisition activities and
is consistent with management’s analysis of the investing and operating
performance of our properties.
|
|
|
|
|
·
|
Other infrequent
charges not related to the operating performance or our
properties. Impairment charges, write-offs of previously
capitalized assets such as costs associated with financing activities and
other infrequent charges, if any, may be excluded from MFFO if we believe
these charges are not useful in the evaluation of our operating
performance. An impairment charge represents a downward adjustment
to the carrying amount of a long-lived asset to reflect the current
valuation of the asset even when the asset is intended to be held
long-term. Such adjustment, when properly recognized under GAAP, may
lag the underlying consequences related to rental rates, occupancy and
other operating performance trends. The valuation is also based, in
part, on the impact of current market fluctuations and estimates of future
capital requirements and long-term operating performance that may not be
directly attributable to current operating performance. Other
charges such as the write-off capitalized financing costs upon the early
disposition of a debt obligation or other non recurring charges are
adjusted excluded from MFFO because we believe that MFFO provides useful
supplemental information by focusing on the changes in our operating
fundamentals rather than on market valuation changes or other infrequent
events not related to our normal
operations.
|
FFO and
MFFO are non-GAAP financial measures and do not represent net income as defined
by GAAP. FFO and MFFO do not represent cash flows from operations as
defined by GAAP, are not indicative of cash available to fund all cash flow
needs and liquidity, including our ability to pay distributions and should not
be considered as an alternative to net income, as determined in accordance with
GAAP, for purposes of evaluating our operating performance.
Our
calculation of FFO, which we believe is consistent with the calculation of FFO
as defined by NAREIT, is presented in the following table for the applicable
periods during the years ended December 31, 2009 and 2008 (amounts in
thousands):
|
|
Three
Months
Ended
March 30,
2009
|
|
|
Three
Months
Ended
June 30,
2009
|
|
|
Three
Months
Ended
September
30,
2009
|
|
|
Three
Months
Ended
December
31,
2009
|
|
|
Total
|
|
Net
loss
|
|
$
|
(1,339
|
)
|
|
$
|
(673
|
)
|
|
$
|
(1,484
|
)
|
|
$
|
(770
|
)
|
|
$
|
(4,266
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
of real estate assets
|
|
|
1,362
|
|
|
|
1,362
|
|
|
|
1,628
|
|
|
|
2,229
|
|
|
|
6,581
|
|
Amortization
of intangible lease assets
|
|
|
269
|
|
|
|
269
|
|
|
|
357
|
|
|
|
444
|
|
|
|
1,339
|
|
Fair
value adjustment (1)
|
|
|
(58
|
)
|
|
|
(524
|
)
|
|
|
193
|
|
|
|
(139
|
)
|
|
|
(528
|
)
|
Noncontrolling interest
adjustment (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
(88
|
)
|
|
|
(83
|
)
|
|
|
(171
|
)
|
FFO
|
|
|
234
|
|
|
|
434
|
|
|
|
606
|
|
|
|
1,681
|
|
|
|
2,955
|
|
Acquisition
and transaction related costs (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
347
|
|
|
|
159
|
|
|
|
506
|
|
Modified
FFO
|
|
$
|
234
|
|
|
$
|
434
|
|
|
$
|
953
|
|
|
$
|
1,839
|
|
|
$
|
3,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
paid (4)
|
|
$
|
220
|
|
|
$
|
410
|
|
|
$
|
883
|
|
|
$
|
1,662
|
|
|
$
|
3,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified
FFO coverage ratio
|
|
|
106.7
|
%
|
|
|
105.9
|
%
|
|
|
107.9
|
%
|
|
|
110.7
|
%
|
|
|
109.0
|
%
|
Modified
FFO payout ratio
|
|
|
93.7
|
%
|
|
|
94.4
|
%
|
|
|
92.7
|
%
|
|
|
90.3
|
%
|
|
|
91.7
|
%
|
(1)
-
|
This
adjustment represents a non-cash fair value adjustment relating to the use
of hedging our debt yield. It is the Companies general strategy to fix its
variable rate debt to mitigate against interest rate volatility. The
Company excludes this non-cash fair value adjustment relating to its
hedging activities from its FFO
calculation.
|
(2)
-
|
Amounts
represent noncontrolling interest portion of depreciation of real estate
assets, amortization of intangible lease assets and fair value
adjustments.
|
(3)
-
|
Amounts
represent acquisition related costs that are required by GAAP to be
expensed as incurred as of January 1,
2009.
|
(4)
-
|
Includes
the value of common shares issued under the
DRIP.
|
|
|
Three
Months
Ended
June 30,
|
|
|
Three
Months
Ended
September
30,
|
|
|
Three
Months
Ended
December
31,
|
|
|
Total
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(454
|
)
|
|
$
|
(845
|
)
|
|
$
|
(2,641
|
)
|
|
$
|
(3,940
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
of real estate assets
|
|
|
617
|
|
|
|
717
|
|
|
|
1,056
|
|
|
|
2,390
|
|
Amortization
of intangible lease assets
|
|
|
120
|
|
|
|
140
|
|
|
|
209
|
|
|
|
469
|
|
Mark-to
market adjustment (1)
|
|
|
(197
|
)
|
|
|
177
|
|
|
|
1,578
|
|
|
|
1,558
|
|
FFO
|
|
$
|
86
|
|
|
$
|
189
|
|
|
$
|
202
|
|
|
$
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
paid (2)
|
|
$
|
80
|
|
|
$
|
174
|
|
|
$
|
191
|
|
|
$
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
coverage ratio
|
|
|
106.8
|
%
|
|
|
108.4
|
%
|
|
|
105.1
|
%
|
|
|
106.7
|
%
|
FFO
payout ratio
|
|
|
93.7
|
%
|
|
|
92.2
|
%
|
|
|
95.2
|
%
|
|
|
93.7
|
%
|
(1)
-
|
This
adjustment represents a non-cash fair value adjustment relating to the use
of hedging our debt yield. It is the Companies general strategy to fix its
variable rate debt to mitigate against interest rate volatility. The
Company excludes this non-cash fair value adjustment relating to its
hedging activities from its FFO
calculation.
|
(2)
-
|
Includes
the value of common shares issued under the DRIP.
|
(3)
-
|
FFO
is not applicable for the three months ended March 31, 2008, as no
distributions were paid during such period. Total includes results
relating to the period from April 1 to December 31,
2008.
|
Liquidity
and Capital Resources
We expect
to continue to raise capital through the sale of shares of our common stock and
to utilize the net proceeds from the sale of our common stock and proceeds from
secured or unsecured financings to complete future property acquisitions.
Management expects that in the future, our portfolio grows, our properties will
generate sufficient cash flow to cover operating expenses and the payment of a
monthly distribution. Other potential future sources of capital include
proceeds from secured or unsecured financings from banks or other lenders,
proceeds from private offerings, proceeds from the sale of properties and
undistributed funds from operations.
Short-term
Liquidity and Capital Resources
We expect
to meet our short-term liquidity requirements through net cash provided by
property operations and proceeds from the sale of our common stock. We
expect our operating cash flows to increase as properties are added to our
portfolio.
Our
principal demands for funds will continue to be for property acquisitions,
either directly or through investment interests, for the payment of operating
expenses, distributions to our investors, repurchases under our share repurchase
plan, and for the payment of interest on our outstanding indebtedness.
Generally, cash needs for property acquisitions will be met through proceeds
from the sale of common stock through our public offering and mortgage
financing. We may also from time to time enter into other agreements with
third parties where by third parties will make equity investments in specific
properties or groups of properties that we acquire.
Long-term
Liquidity and Capital Resources
We expect
to meet our long-term liquidity requirements through proceeds from the sale of
our common stock, proceeds from secured or unsecured financings from banks and
other lenders, the selective and strategic sale of properties and net cash flows
from operations. We expect that our primary uses of capital will be for
property acquisitions, for the payment of tenant improvements, for the payment
of offering-related costs, for the payment of operating expenses, including
interest expense on any outstanding indebtedness, and for the payment of
distributions to our stockholders.
We expect
that substantially all net cash generated from operations will be used to pay
distributions to our stockholders after certain capital expenditures, including
tenant improvements and leasing commissions, are paid at the properties;
however, we may use other sources to fund distributions as necessary. To
the extent that cash flows from operations are lower due to fewer properties
being acquired or lower returns on the properties, distributions paid to our
stockholders may be lower. We expect that substantially all net cash
resulting from equity or debt financing will be used to fund acquisitions,
certain capital expenditures identified at acquisition, repayments of
outstanding debt, or distributions to our stockholders.
Loan
Obligations
The
payment terms of our loan obligations vary. In general, principal and
interest are payable monthly with all unpaid principal and interest due at
maturity. Certain of our mortgage loans have initial payments of interest
only but require principal repayment in subsequent years. Some of our loan
agreements stipulate that we comply with specific reporting and financial
covenants mainly related to debt coverage ratios and loan to value ratios.
Each loan that has these requirements has specific ratio thresholds that must be
met. As of March 31, 2010, we were in compliance with the debt covenants
under our loan agreements.
Our
advisor may, with approval from our independent board of directors, seek to
borrow short-term capital that, combined with secured mortgage financing,
exceeds our targeted leverage ratio. Some short-term borrowings may be
obtained from third-parties on a case-by-case basis as acquisition opportunities
present themselves simultaneous with our capital raising efforts. We view
the use of short-term borrowings as an efficient and accretive means of
acquiring real estate in advance of raising equity capital. Accordingly,
we can take advantage of buying opportunities as we expand our fund raising
activities. As additional equity capital is obtained, these short-term
borrowings will be repaid. Our leverage ratio approximated 54.8% (secured
mortgage notes payable as a percentage of total real estate investments, at
cost) as of March 31 2010.
In
addition as of March 31, 2010 we have an unused short-term equity line available
to us from a related party entity that allows us to draw a maximum of $10.0
million.
Other
Obligations
Our board
of directors has adopted a share repurchase plan that enables our stockholders
to sell their shares to us under limited circumstances. At the time a
shareholder requests redemption, we may, subject to certain conditions, redeem
the shares presented for repurchase for cash to the extent we have sufficient
funds available to fund such purchase. As of March 31, 2010 we have had
requests to repurchase a total of 3,000 shares at a value of $29
thousand.
As of
March 31, 2010, we had cash and cash equivalents of $2.8 million, which we
expect to be used primarily to invest in additional real estate, pay operating
expenses and pay stockholder distributions. Our charter prohibits us from
incurring debt that would cause our borrowings to exceed the greater of 75% of
the greater of the aggregate cost (before depreciation and other non-cash
reserves) or the aggregate fair market value of all assets owned by us as of the
date of any borrowing, unless approved by a majority of our independent
directors and disclosed to our stockholders in our next quarterly report.
The independent directors may approve borrowings that cause our leverage ratio
at certain times to exceed the 75% limitation. Such borrowing levels would
be justified for the following reasons:
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the
borrowings would enable us to purchase the properties and earn rental
income more quickly;
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the
property acquisitions are likely to increase the net offering proceeds
from our initial public offering by allowing us to show potential
investors actual acquisitions, thereby improving our ability to meet our
goal of acquiring a diversified portfolio of properties to generate
current income for investors and preserve investor capital;
and
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based
on expected equity sales at the time and scheduled maturities of our
short-term variable rate debt, leverage would likely exceed the charter’s
guidelines only for a limited period of
time.
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Election
as a REIT
We have
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended. To qualify as a REIT, we must meet certain organizational and
operational requirements, including a requirement to distribute at least 90% of
our ordinary taxable income to stockholders. If we continue to qualify as
a REIT, we generally will not be subject to U.S. federal income tax on taxable
income that we distribute to our stockholders. Even if we qualify for
taxation as a REIT, we may be subject to certain state and local taxes on our
income and property, and federal income and excise taxes on our undistributed
income. If we fail to qualify as a REIT in any taxable year, we will then
be subject to U.S. federal income taxes on our taxable income for four years
following the year during which qualification is lost, unless the Internal
Revenue Service grants us relief under certain statutory provisions. Such
an event could materially adversely affect our net income and net cash available
for distribution to stockholders. However, we believe that we will be
organized and operate in such a manner as to qualify for treatment as a REIT for
U.S. federal income tax purposes.
Inflation
We will
be exposed to inflation risk as income from long-term leases is the primary
source of our cash flows from operations. Some of our leases contain
provisions designed to mitigate the adverse impact of inflation. These
provisions generally increase rental rates during the terms of the leases either
at fixed rates or indexed escalations (based on the Consumer Price Index or
other measures). We may be adversely impacted by inflation on the leases
that do not contain indexed escalation provisions. In addition, our net leases
require the tenant to pay its allocable share of operating expenses, including
common area maintenance costs, real estate taxes and insurance. This may
reduce our exposure to increase costs and operating expenses resulting from
inflation. However, due to the long-term nature of the leases, the leases
may not re-set frequently enough to cover inflation.
Related-Party
Transactions and Agreements
We have
entered into agreements with American Realty Capital Advisors, LLC and its
affiliates, whereby we will pay certain fees to, or reimburse certain expenses
of, American Realty Capital Advisors, LLC or its affiliates for acquisition and
advisory fees and expenses, organization and offering costs, sales commissions,
dealer manager fees, asset and property management fees and reimbursement of
operating costs. Refer to Note 10 to our consolidated financial statements
incorporated by reference to this prospectus for further discussion of the
various related-party transactions agreements and fees.
Conflicts
of Interest
Affiliates
of American Realty Capital Advisors, LLC may act as sponsor, general partner or
advisor to various private real estate limited partnerships or a REIT, that
offer its shares pursuant to an exemption from registration. As such,
there may be conflicts of interest where American Realty Capital Advisors, LLC
or its affiliates, while serving in the capacity as sponsor, general partner or
advisor for another American Realty Capital sponsored program, may be in
competition with us in connection with property acquisitions, property
dispositions, and property management. The compensation arrangements
between affiliates of American Realty Capital Advisors, LLC and these other
American Realty Capital sponsored programs could influence American Realty
Capital Advisor’s advice to us. See the section captioned “Conflicts of
Interest” elsewhere in this prospectus.
Impact
of Recent Accounting Pronouncements
Refer to
Note 2 to our consolidated financial statements which are incorporated by
reference to this prospectus for further explanation of applicable new
accounting pronouncements. There are no new account pronouncements that
have been issued but not yet applied by us that we believe will have a material
impact on our consolidated financial statements.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements.
PRIOR
PERFORMANCE SUMMARY
Prior
Investment Programs
The
information presented in this section represents the historical experience of
the real estate programs managed over the last ten years by Messrs. Schorsch and
Kahane. Investors should not assume that they will experience returns, if
any, comparable to those experienced by investors in such prior real estate
programs.
We intend
to conduct this offering in conjunction with future offerings by one or more
public and private real estate entities sponsored by American Realty Capital and
their affiliates. American Realty Capital New York Recovery REIT, Inc.
(“NY Recovery REIT”) and Phillips Edison — ARC Shopping Center REIT, Inc.
(“Phillips Edison — ARC Shopping Center REIT”) are two American Realty Capital
sponsored programs currently in registration with the U.S. Securities and
Exchange Commission (the “SEC”). All of our executive officers and
directors are also executive officers and directors of New York Recovery
REIT. Mr. Kahane is also a director of Phillips Edison — ARC Shopping
Center REIT. To the extent that these entities or others have the same or
similar objectives as ours or involve similar or nearby properties, they may be
in competition with the properties acquired by us. See the section
entitled “Conflicts of Interest” in this prospectus for additional
information.
American
Realty Capital, LLC
American
Realty Capital, LLC began acquiring properties in December 2006. During
the period of January 1, 2007 to December 31, 2007 American Realty Capital, LLC
acquired 73 property portfolios, totaling just over 1,767,00 square feet for an
aggregate purchase price of approximately $407.5 million. These properties
included five Hy Vee supermarkets, one CVS distribution center, three CVS drug
stores, ten Rite Aids, sixteen Walgreens drug stores, 15 Harleysville bank
branches, a portfolio of fifteen Logan’s Roadhouse Restaurants, six Tractor
Supply Company stores, one Shop N Save supermarket, and one Fed Ex cross dock
facility. The underlying leases within these acquisitions ranged from 10
to 25 years before any tenant termination rights, with a dollar-weighted-average
lease term of approximately 21 years based on rental revenue. American Realty
Capital, LLC acquired no properties after December 31, 2007. During the
period of April 1, 2007 through October 31, 2009, American Realty Capital, LLC
sold nine properties: four Walgreens drug stores, four Logan’s Roadhouse
Restaurants and one CVS pharmacy for total sales proceeds of
50,154.
American
Realty Capital, LLC has operated in three (3) capacities; joint-venture (“JV”)
partner, sole investor and advisor.
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(1)
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JV
partner: As indicated in the chart below, most of American Realty
Capital, LLC’s properties have been acquired in joint venture with other
investors, where American Realty Capital, LLC acts as advisor and American
Realty Capital, LLC or its principals also act as an equity
investor,
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(2)
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Sole
Investor: American Realty Capital, LLC has also purchased properties
for its own account where it is the sole investor,
and
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(3)
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Advisor:
American Realty Capital, LLC has acted as an advisor and not invested any
of its or its principal’s equity in the
property.
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No money
was raised from investors in connection with the properties acquired by American
Realty Capital, LLC. All American Realty Capital, LLC transactions were
done with the equity of the principals or joint-venture partners of American
Realty Capital, LLC.
In
instances where American Realty Capital, LLC was not an investor in the
transaction, but rather an advisor, American Realty Capital, LLC typically
performed the following advisory services:
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Identified
potential properties for
acquisition
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Negotiated
Letters of Intent and Purchase and Sale
Contracts
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Performed
due diligence
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Nicholas
S. Schorsch
During
the period 1998-2002, our sponsor, Nicholas S. Schorsch, sponsored 7 private
programs which raised approximately $38,300,000 from 93 investors that acquired
properties with an aggregate purchase price of approximately $272,285,000.
These private programs (“Predecessor Entities”) financed their investments with
investor equity and institutional first mortgages. These properties are
located throughout the United States as indicated in the table below.
Ninety-four percent of the properties acquired were bank branches and 6% of the
properties acquired were office buildings. None of the properties included
in the aforesaid figures were newly constructed. Each of these Predecessor
Entities is similar to our program because they invested in long-term net lease
commercial properties. The Predecessor Entities properties are located as
follows:
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34 |
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1,193,741 |
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38 |
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149,351 |
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3 |
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65,992 |
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1 |
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17,434 |
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4 |
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16,202 |
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2 |
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13,837 |
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1 |
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9,660 |
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4 |
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8,139 |
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2 |
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7,612 |
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1 |
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6,700 |
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AFR
In 2002,
American Financial Realty Trust (“AFR”) was founded by Nicholas S.
Schorsch. In September and October 2002, AFR sold approximately 40.8
million common shares in a Rule 144A private placement. These sales
resulted in aggregate net proceeds of approximately $378.6 million.
Simultaneous with the sale of such shares, AFR acquired the Predecessor Entities
for an aggregate purchase price of $230.5 million, including the assumption of
indebtedness, consisting of a portfolio of 87 bank branches and six office
buildings containing approximately 1.5 million rentable square feet. Mr.
Schorsch was the President, CEO and Vice-Chairman of AFR. Mr. Kahane was
the Chairman of the Finance Committee of AFR’s Board of Trustees. AFR went
public in June 2003 in what was at the time the second largest real estate
investment trust initial public offering in U.S. history, raising over $800
million. Three years after AFR was an industry leader, with over $4.3
billion in assets, over 1,110 properties in more than 37 states, over 35.0
million square feet, 175 employees and a well diversified portfolio of bank
tenants.
Private
Note Programs
ARC
Income Properties, LLC implemented a note program that raised aggregate gross
proceeds of $19.5 million. The net proceeds were used to acquire, and pay
related expenses in connection with, a portfolio of 65 bank branch properties
triple-net leased to RBS Citizens, NA. and Citizens Bank of Pennsylvania.
The purchase price for those bank branch properties also was funded with
proceeds received from mortgage loans, as well as equity capital invested by
American Realty Capital II, LLC. Such properties contain approximately
323,000 square feet with a purchase price of approximately $98.8 million.
The properties are triple-net leased for a primary term of five years and
include extension provisions. The notes issued under this note program by
ARC Income Properties, LLC were sold by Realty Capital Securities through
participating broker-dealers.
ARC
Income Properties II, LLC implemented a note program that raised aggregate gross
proceeds of $13.0 million. The net proceeds were used to acquire, and pay
related expenses in connection with, a portfolio of 50 bank branch properties
triple-net leased to PNC Bank. The purchase price for those bank branch
properties also was funded with proceeds received from a mortgage loan, as well
as equity capital raised by American Realty Capital Trust, Inc. in connection
with its public offering of equity securities. The properties are
triple-net leased with primary term of ten years with a 10% rent increase after
5 years. The notes issued under this note program by ARC Income Properties
II, LLC were sold by Realty Capital Securities through participating
broker-dealers. Please see the Prior Performance Tables set forth on
Appendix B.
ARC
Income Properties III, LLC implemented a note program that raised aggregate
gross proceeds of $11.2 million. The net proceeds were used to acquire,
and pay related expenses in connection with the acquisition of a distribution
facility triple-net leased to Home Depot. The purchase price for the
property was also funded with proceeds received from a mortgage loan. The
property has a primary lease term of twenty years which commenced on January 30,
2010 with a 2% escalation each year. The notes issued under this note
program by ARC Income Properties III, LLC were sold by Realty Capital Securities
through participating broker-dealers. Please see the Prior Performance
Tables set forth on Appendix B.
ARC
Growth Partnership, LP
ARC
Growth Partnership, LP is a non-public real estate program formed to acquire
vacant bank branch properties and opportunistically sell such properties, either
vacant or subsequent to leasing the bank branch to a financial institution or
other third-party tenant. Total gross proceeds of approximately $7.9
million were used to acquire, and pay related expenses in connection with, a
portfolio of vacant bank branches. The purchase price of the properties
also was funded with proceeds received from a three-year revolving warehouse
facility. The purchase price for each bank branch is derived from a
formulated price contract entered into with a financial institution.
During the period from July 2008 to January 2009, ARC Growth Partnership
acquired 54 vacant bank branches from Wachovia Bank, N.A., under nine separate
transactions. Such properties contain approximately 230,000 square feet
with a gross purchase price of approximately $63.6 million. As of
September 30, 2009, 52 properties were sold, 28 of which were acquired and
simultaneously sold, resulting in an aggregate gain of approximately $5.6
million. ARC Growth Partnership, LP mutually terminated the contractual
agreement with Wachovia Bank, N.A. in March 2009, and has not acquired any
vacant bank branches following this termination. ARC Growth Partnership,
LP is currently in the process of selling its remaining four (4) assets and has
converted the revolving warehouse facility to a term loan with a maturity date
of December 23, 2011. Please see the Prior Performance Tables set forth on
Appendix B.
Section
1031 Programs
The
Operating Partnership has transferred forty-nine percent (49%) of its ownership
interest in the Federal Express Distribution Facility, located in Snowshoe,
Pennsylvania, and a PNC Bank branch, located in Palm Coast, Florida (when we
acquired this property, it was a National City Bank property; see “Real Property
Investments — National City Bank Properties”), to American Realty Capital DST I
(the “Trust”), a Section 1031 Exchange Program. Realty Capital Securities, LLC
has offered membership interests of up to forty-nine percent (49%), or
$2,567,000, in the Trust to investors in a private offering. The remaining
interests of no less than 51% will be retained by the Operating Partnership. To
date, cash payments of $2,567,000 have been accepted by the Operating
Partnership.
The
Operating Partnership has transferred thirty-five and 2/10th percent (35.2%) of
its ownership interest in a PNC Bank branch location, located in Pompano Beach,
Florida (when we acquired this property, it was a National City Bank property;
see “Real Property Investments — National City Bank Properties”), to American
Realty Capital DST II (the “Trust II”), a Section 1031 Exchange Program. Realty
Capital Securities has offered membership interests of thirty-five and 2/10th
percent (35.2%), or $493,802, in the Trust II to investors in a private
offering. The remaining interests of no less than 64.8% will be retained by the
Operating Partnership. To date, cash payments of $493,802 have been accepted by
the Operating Partnership.
The
Operating Partnership has transferred forty-nine percent (49%) of its ownership
interest in three CVS properties, located in Smyrna, GA, Chicago, IL and
Visalia, CA to American Realty Capital DST III (the “Trust III”), a Section 1031
Exchange Program. Realty Capital Securities has offered membership interests of
up to forty-nine percent (49%), or $3,050,000, in the Trust III to investors in
a private offering. The remaining interests of no less than fifty-one percent
(51%) will be retained by the Operating Partnership. To date, cash payments of
$3,050,000 have been accepted by the Operating Partnership.
The
Company purchased a Walgreens property in Sealy, TX under a tenant in common
arrangement (“TIC”) with a third party investor. Under the TIC arrangement, the
third party assumed a forty-four percent (44%) interest in the property at the
time of acquisition for an investment of $1,200,000. The remaining interest of
fifty-six percent (56%) was retained by the Company. To date cash payments of
$1,200,000 have been accepted by the Operating Partnership.
The
Operating Partnership shall transfer up to forty-nine percent (49%) of its
ownership interest in six Bridgestone Firestone properties, located in Texas and
New Mexico to American Realty Capital DST IV (the “Trust IV”), a Section 1031
Exchange Program. Realty Capital Securities has offered membership interests of
up to forty-nine percent (49%), or $7,294,000, in the Trust IV to investors in a
private offering. The remaining interests of no less than fifty-one percent
(51%) will be retained by the Operating Partnership. To date, cash payments of
$2,770,000 have been accepted by the Operating Partnership
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following discusses the material U.S. federal income tax considerations
associated with our qualification and taxation as a REIT and the acquisition,
ownership and disposition of our shares of common stock. This discussion is
based upon the laws, regulations, and reported judicial and administrative
rulings and decisions in effect as of the date of this prospectus, all of which
are subject to change, retroactively or prospectively, and to possibly differing
interpretations. This discussion does not purport to deal with the U.S. federal
income and other tax consequences applicable to all investors in light of their
particular investment or other circumstances, or to all categories of investors,
some of whom may be subject to special rules (for example, insurance companies,
entities treated as partnerships for U.S. federal income tax purposes and
investors therein, trusts, financial institutions and broker-dealers and, except
to the extent discussed below, tax-exempt organizations and Non-U.S.
Stockholders, as defined below). No ruling on the U.S. federal,
state, or local tax considerations relevant to our operation or to the purchase,
ownership or disposition of our shares, has been requested from the Internal
Revenue Service, or IRS, or other tax authority. No assurance can be given
that the IRS would not assert, or that a court would not sustain, a position
contrary to any of the tax consequences described below.
This
summary is also based upon the assumption that the operation of the company, and
of its subsidiaries and other lower-tier and affiliated entities, will in each
case be in accordance with its applicable organizational documents or
partnership agreements. This summary does not discuss the impact that U.S.
state and local taxes and taxes imposed by non U.S. jurisdictions could have on
the matters discussed in this summary. In addition, this summary assumes
that security holders hold our common stock as a capital asset, which generally
means as property held for investment.
Prospective
investors are urged to consult their tax advisors in order to determine the U.S.
federal, state, local, foreign and other tax consequences to them of the
purchase, ownership and disposition of our shares, the tax treatment of a REIT
and the effect of potential changes in the applicable tax laws.
We have
elected to be taxed as a REIT under the applicable provisions of the Code and
the Treasury Regulations promulgated thereunder commencing with our taxable year
ending December 31, 2008. Furthermore, we intend to continue operating as
a REIT; however, we cannot assure you that we will meet the applicable
requirements under U.S. federal income tax laws, which are highly technical and
complex.
In brief,
a corporation that complies with the provisions in Sections 856 through 860 of
the Code, and qualifies as a REIT generally is not taxed on its net taxable
income to the extent such income is currently distributed to stockholders,
thereby completely or substantially eliminating the “double taxation” that a
corporation and its stockholders generally bear together. However, as discussed
in greater detail below, a corporation could be subject to U.S. federal income
tax in some circumstances even if it qualifies as a REIT and would likely suffer
adverse consequences, including reduced cash available for distribution to its
stockholders, if it failed to qualify as a REIT.
Proskauer
Rose LLP has acted as our tax counsel in connection with this registration
statement. Proskauer Rose LLP is of the opinion that (i) commencing with our
taxable year ended on December 31, 2008, we have been organized in conformity
with the requirements for qualification as a REIT under the Code and our actual
method of operation through the date hereof has enabled and, assuming that our
election to be treated as a REIT is not either revoked or intentionally
terminated, our proposed method of operation will enable us to continue to meet
the requirements for qualification and taxation as a REIT under the Code, and
(ii) our operating partnership has been and will be taxed as a partnership and
not an association or publicly traded partnership (within the meaning of Code
Section 7704) subject to tax as a corporation, for U.S. federal income tax
purposes beginning with its first taxable year. This opinion has been filed as
an exhibit to the registration statement of which this prospectus is a part, and
is based and conditioned, in part, on various assumptions and representations as
to factual matters and covenants made to Proskauer Rose LLP by us and based upon
certain terms and conditions set forth in the opinion. Our qualification as a
REIT depends upon our ability to meet, through operation of the properties we
acquire and our investment in other assets, the applicable requirements under
U.S. federal income tax laws. Proskauer Rose LLP has not reviewed these
operating results for compliance with the applicable requirements under U.S.
federal income tax laws. Therefore, we cannot assure you that our actual
operating results allow us to satisfy the applicable requirements to qualify as
a REIT under U.S. federal income tax laws in any taxable
year.
General
The term
“REIT taxable income” means the taxable income as computed for a corporation
which is not a REIT:
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without
the deductions allowed by Code Sections 241 through 247, and 249 (relating
generally to the deduction for dividends
received);
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excluding
amounts equal to: the net income from foreclosure property and the net
income derived from prohibited
transactions;
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deducting
amounts equal to: the net loss from foreclosure property, the net loss
derived from prohibited transactions, the tax imposed by Code Section
857(b)(5) upon a failure to meet the 95% and/or the 75% gross income
tests, the tax imposed by Code Section 856(c)(7)(C) upon a failure to meet
the quarterly asset tests, the tax imposed by Code Section 856(g)(5) for
otherwise avoiding REIT disqualification, and the tax imposed by Code
Section 857(b)(7) on redetermined rents, redetermined deductions and
excess interest;
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deducting
the amount of dividends paid under Code Section 561, computed without
regard to the amount of the net income from foreclosure property (which is
excluded from REIT taxable income);
and
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without
regard to any change of annual accounting period pursuant to Code Section
443(b).
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In any
year in which we qualify as a REIT and have a valid election in place, we will
claim deductions for the dividends we pay to the stockholders, and therefore
will not be subject to U.S. federal income tax on that portion of our taxable
income or capital gain which is distributed to our stockholders.
Although
we can eliminate or substantially reduce our U.S. federal income tax liability
by maintaining our REIT qualification and paying sufficient dividends, we will
be subject to U.S. federal tax in the following circumstances:
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We
will be taxed at normal corporate rates on any undistributed REIT taxable
income or net capital gain.
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If
we fail to satisfy either the 95% Gross Income Test or the 75% Gross
Income Test (each of which is described below), but our failure is due to
reasonable cause and not willful neglect, and we therefore maintain our
REIT qualification, we will be subject to a tax equal to the product of
(a) the amount by which we failed the 75% or 95% Test (whichever amount is
greater) multiplied by (b) a fraction intended to reflect our
profitability.
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We
will be subject to an excise tax if we fail to currently distribute
sufficient income. In order to make the “required distribution” with
respect to a calendar year, we must distribute the sum of (1) 85% of our
REIT ordinary income for the calendar year, (2) 95% of our REIT capital
gain net income for the calendar year, and (3) the excess, if any, of the
grossed up required distribution (as defined in the code) for the
preceding calendar year over the distributed amount for that preceding
calendar year. Any excise tax liability would be equal to 4% of the
difference between the amount required to be distributed under this
formula and the amount actually distributed and would not be deductible by
us.
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We
may be subject to the corporate “alternative minimum tax” on our items of
tax preference, including any deductions of net operating
losses.
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If
we have net income from prohibited transactions such income would be
subject to a 100% tax. See the section entitled “— REIT Qualification
Tests — Prohibited Transactions”
below.
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We
will be subject to U.S. federal income tax at the highest corporate rate
on any non-qualifying income from foreclosure property, although we will
not own any foreclosure property unless we make loans or accept purchase
money notes secured by interests in real property and foreclose on the
property following a default on the loan, or foreclose on property
pursuant to a default on a lease.
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If
we fail to satisfy any of the REIT asset tests, as described below, other
than a failure of the 5% or 10% REIT assets tests that does not exceed a
statutory de minimis amount as described more fully below, but our failure
is due to reasonable cause and not due to willful neglect and we
nonetheless maintain our REIT qualification because of specified cure
provisions, we will be required to pay a tax equal to the greater of
$50,000 or the highest corporate tax rate (currently 35%) of the net
income generated by the non qualifying assets during the period in which
we failed to satisfy the asset
tests.
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If
we fail to satisfy any other provision of the Code that would result
in our failure to qualify as a REIT (other than a gross income or asset
test requirement) and that violation is due to reasonable cause, we may
retain our REIT qualification, but we will be required to pay a penalty of
$50,000 for each such failure.
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We
may be required to pay monetary penalties to the IRS in certain
circumstances, including if we fail to meet record-keeping requirements
intended to monitor our compliance with rules relating to the composition
of our stockholders.
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If
we acquire any asset from a corporation that is subject to full
corporate-level U.S. federal income tax in a transaction in which our
basis in the asset is determined by reference to the transferor
corporation’s basis in the asset, and we recognize gain on the disposition
of such an asset during the 10-year period beginning on the date we
acquired such asset, then the excess of the fair market value as of
the beginning of the applicable recognition period over our adjusted basis
in such asset at the beginning of such recognition period will be subject
to U.S. federal income tax at the highest regular corporate U.S. federal
income tax rate. The results described in this paragraph assume that the
non REIT corporation will not elect, in lieu of this treatment, to be
subject to an immediate tax when the asset is acquired by
us.
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A
100% tax may be imposed on transactions between us and a TRS that do not
reflect arm’s-length terms.
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The
earnings of our subsidiaries that are C corporations, including any
subsidiary we may elect to treat as a TRS will generally be subject to
U.S. federal corporate income tax.
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We
may elect to retain and pay income tax on our net capital gain. In
that case, a stockholder would include his, her or its proportionate share
of our undistributed net capital gain (to the extent we make a timely
designation of such gain to the stockholder) in his, her or its income, as
long term capital gain would be deemed to have paid the tax that we
paid on such gain, and would be allowed a credit for his, her or its
proportionate share of the tax deemed to have been paid, and an adjustment
would be made to increase the stockholder's basis in our common
stock. Stockholders that are U.S. corporations will also
appropriately adjust their earnings and profits for the retained capital
gain in accordance with Treasury Regulations to be
promulgated.
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In
addition, notwithstanding our qualification as a REIT, we and our subsidiaries
may be subject to a variety of taxes, including state and local and foreign
income, property, payroll and other taxes on our assets and operations. We could
also be subject to tax in situations and on transactions not presently
contemplated.
REIT
Qualification Tests
The Code
defines a REIT as a corporation, trust or association:
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that
is managed by one or more trustees or
directors;
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the
beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial
interest;
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that
would be taxable as a domestic corporation but for its qualification as a
REIT;
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that
is neither a financial institution nor an insurance
company;
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that
meets the gross income, asset and annual distribution
requirements;
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the
beneficial ownership of which is held by 100 or more persons on at least
335 days in each full taxable year, proportionately adjusted for a short
taxable year;
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generally
in which, at any time during the last half of each taxable year, no more
than 50% in value of the outstanding stock is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to
include specified entities);
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that
makes an election to be taxable as a REIT for the current taxable year, or
has made this election for a previous taxable year, which election has not
been revoked or terminated, and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met to
maintain qualification as a REIT;
and
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that
uses a calendar year for U.S. federal income tax
purposes.
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The first
five conditions must be met during each taxable year for which REIT
qualification is sought, while the sixth and seventh conditions do not have to
be met until after the first taxable year for which a REIT election is
made. We have adopted December 31 as our year end, thereby satisfying the
last condition.
Although
the 25% Asset Test (as defined below) generally prevents a REIT from owning more
than 10% of the stock, by vote or value, of an entity other than another REIT,
the Code provides an exception for ownership of stock in a qualified REIT
subsidiary and in a TRS. A qualified REIT subsidiary is a corporation that is
wholly owned by a REIT, and that it is not a TRS. For purposes of the
Asset Tests and Gross Income Tests (each as defined below), all assets,
liabilities and tax attributes of a qualified REIT subsidiary are treated as
belonging to the REIT. A qualified REIT subsidiary is not subject to U.S.
federal income tax, but may be subject to state or local tax. Although we expect
to hold most of our investments through our operating partnership, we may hold
some investments through qualified REIT subsidiaries. A TRS is described
in the section entitled “— 25% Asset Test” below. With respect to the
operating partnership, an entity taxed as a partnership is not subject to U.S.
federal income tax, and instead allocates its tax attributes to its partners.
The partners are subject to U.S. federal income tax on their allocable share of
the income and gain, without regard to whether they receive distributions from
the partnership. Each partner’s share of a partnership’s tax attributes
generally is determined in accordance with the partnership agreement. For
purposes of the Asset and Gross Income Tests, we will be deemed to own a
proportionate share (based on our capital interest) of the assets of the
operating partnership and we will be allocated a proportionate share of each
item of gross income of the operating partnership.
In
satisfying the tests described above, we must meet, among others, the following
requirements:
Share Ownership Tests.
The common stock and any other stock we issue must be held by a minimum of 100
persons (determined without attribution to the owners of any entity owning our
stock) for at least 335 days in each full taxable year, proportionately adjusted
for partial taxable years. In addition, we cannot be “closely-held”, which
means that at all times during the second half of each taxable year, no more
than 50% in value of our stock may be owned, directly or indirectly, by five or
fewer individuals (determined by applying certain attribution rules under the
Code to the owners of any entity owning our stock) as specifically defined for
this purpose. However, these two requirements do not apply until after the first
taxable year an entity elects REIT qualification.
Our
charter contains certain provisions intended to enable us to meet the sixth and
seventh requirement above. First, subject to certain exceptions, our charter
provides that no person may beneficially or constructively own (applying certain
attribution rules under the Code) more than 9.8% in value of the aggregate of
our outstanding shares of stock and not more than 9.8% (in value or in number of
shares, whichever is more restrictive) of any class or series of shares of our
stock, as well as in certain other circumstances. See the section entitled
“Description of Securities — Restrictions on Ownership and Transfer”
in this prospectus. Additionally, our charter contains provisions requiring each
holder of our shares to disclose, upon demand, constructive or beneficial
ownership of shares as deemed necessary to comply with the requirements of the
Code. Furthermore, stockholders failing or refusing to comply with our
disclosure request will be required, under Treasury Regulations promulgated
under the Code, to submit a statement of such information to the IRS at the time
of filing their annual income tax returns for the year in which the request was
made.
Asset Tests. At the
close of each calendar quarter of the taxable year, we must satisfy four tests
based on the composition of our assets, or the Asset Tests. After initially
meeting the Asset Tests at the close of any quarter, we will not lose our
qualification as a REIT for failure to satisfy the Asset Tests at the end of a
later quarter solely due to changes in value of our assets. In addition, if the
failure to satisfy the Asset Tests results from an acquisition during a quarter,
the failure generally can be cured by disposing of non-qualifying assets within
30 days after the close of that quarter. We will continue to maintain adequate
records of the value of our assets to ensure compliance with these tests and
will act within 30 days after the close of any quarter as may be required to
cure any noncompliance.
75% Asset Test. At
least 75% of the value of our assets must be represented by “real estate
assets,” cash, cash items (including receivables) and government securities,
which we refer to as the 75% Asset Test. Real estate assets include (1) real
property (including interests in real property and interests in mortgages on
real property), (2) shares in other qualifying REITs and (3) any property (not
otherwise a real estate asset) attributable to the temporary investment of “new
capital” in stock or a debt instrument, but only for the one-year period
beginning on the date we received the new capital. Property will qualify as
being attributable to the temporary investment of new capital if the money used
to purchase the stock or debt instrument is received by us in exchange for our
stock (other than amounts received pursuant to our initial
offering’s distribution reinvestment plan) or in a public offering of debt
obligations that have a maturity of at least five years. Assets that do not
qualify for purposes of the 75% test are subject to the additional asset tests
described below under “—25% Asset Test.”
We are
currently invested in the real properties described in the “Real Property
Investments” section of this prospectus. We anticipate that substantially
all of our gross income will be from sources that will allow us to satisfy the
income tests described below. Further, our purchase contracts for such real
properties will apportion no more than 5% of the purchase price of any property
to property other than “real property,” as defined in the Code. However, there
can be no assurance that the IRS will not contest such purchase price
allocation. If the IRS were to prevail, resulting in more than 5% of the
purchase price of property being allocated to other than “real property,” we may
be unable to continue to qualify as a REIT under the 75% Asset Test, and also
may be subject to additional taxes, as described below. In addition, we intend
to invest funds not used to acquire properties in cash sources, “new capital”
investments or other liquid investments which allow us to continue to qualify
under the 75% Asset Test. Therefore, our investment in real properties should
constitute “real estate assets” and should allow us to meet the 75% Asset
Test.
25% Asset Test. Except
as described below, the remaining 25% of our assets may generally be invested
without restriction, which we refer to as the 25% Asset Test. However, if we
invest in any securities that do not qualify under the 75% Asset Test, such
securities may not exceed either (1) 5% of the value of our assets as to
any one issuer; or (2) 10% of the outstanding securities by vote or value
of any one issuer. The 10% value test does not apply to certain “straight debt”
and other excluded securities, as described in the Code, including but not
limited to any loan to an individual or estate, any obligation to pay rents from
real property and any security issued by a REIT. In addition, a
partnership interest held by a REIT is not considered a “security” for purposes
of the 10% value test; instead, the REIT is treated as owning directly its
proportionate share of the partnership’s assets, which is based on the REIT's
proportionate interest in any securities issued by the partnership (disregarding
for this purpose the general rule that a partnership interest is not a
security), but excluding certain securities described in the Code.
Two
modifications apply to the 25% Asset Test for “qualified REIT subsidiaries” or
“taxable REIT subsidiaries.” As discussed above, the stock of a qualified
REIT subsidiary is not counted for purposes of the 25% Asset Test. A qualified
REIT subsidiary is a corporation that is wholly owned by a REIT and that is not
a TRS. All assets, liabilities and tax attributes of a qualified REIT subsidiary
are treated as belonging to the REIT. A qualified REIT subsidiary is not subject
to U.S. federal income tax, but may be subject to other taxes. Although we
expect to hold all of our investments through the operating partnership, we also
may hold investments separately, through qualified REIT subsidiaries. As
described above, a qualified REIT subsidiary must be wholly owned by a REIT.
Thus, any such subsidiary utilized by us would have to be owned by us, or
another qualified REIT subsidiary, and would not be owned by the operating
partnership.
Additionally,
a REIT may own the stock of a TRS which is a corporation (other than another
REIT) that is owned in whole or in part by a REIT, and joins in an election with
the REIT to be classified as a TRS. A corporation that is 35% owned by a TRS
also will be treated as a TRS. A TRS may not be a qualified REIT subsidiary, and
vice versa. A TRS is subject to full corporate-level tax on its income. As
described below regarding the 75% Gross Income Test, a TRS is utilized in much
the same way an independent contractor is used to provide types of services
without causing the REIT to receive or accrue some types of non-qualifying
income. For purposes of the 25% Asset Test, securities of a TRS are excepted
from the 10% vote and value limitations on a REIT’s ownership of securities of a
single issuer. However, no more than 25% of the value of a REIT may be
represented by securities of one or more TRSs. In addition to using independent
contractors to provide services in connection with the operation of our
properties, we also may use TRSs to carry out these functions.
We
believe that our holdings of real estate assets and other securities comply with
the foregoing REIT asset requirements, and we intend to monitor compliance on an
ongoing basis. We may make real estate related debt investments, provided
the underlying real estate meets our criteria for direct investment. A real
estate mortgage loan that we own generally will be treated as a real estate
asset for purposes of the 75% REIT asset test if, on the date that we acquire or
originate the mortgage loan, the value of the real property securing the loan is
equal to or greater than the principal amount of the loan. A REIT is able to
cure certain asset test violations. As noted above, a REIT cannot own securities
of any one issuer representing more than 5% of the total value of the REIT’s
assets or more than 10% of the outstanding securities, by vote or value, of any
one issuer. However, a REIT would not lose its REIT qualification for failing to
satisfy these 5% or 10% asset tests in a quarter if the failure is due to the
ownership of assets the total value of which does not exceed the lesser of (1)
1% of the total value of the REIT’s assets at the end of the quarter for which
the measurement is done, or (2) $10 million; provided in either case that
the REIT either disposes of the assets within six months after the last day of
the quarter in which the REIT identifies the failure (or such other time period
prescribed by the Treasury), or otherwise meets the requirements of those rules
by the end of that period.
If a REIT
fails to meet any of the asset test requirements for a quarter and the failure
exceeds the de minimis threshold described above, then the REIT still would be
deemed to have satisfied the requirements if (1) following the REIT’s
identification of the failure, the REIT files a schedule with a description of
each asset that caused the failure, in accordance with regulations prescribed by
the Treasury; (2) the failure was due to reasonable cause and not to willful
neglect; (3) the REIT disposes of the assets within six months after the last
day of the quarter in which the identification occurred or such other time
period as is prescribed by the Treasury (or the requirements of the rules are
otherwise met within that period); and (4) the REIT pays a tax on the failure
equal to the greater of (1) $50,000, or (2) an amount determined (under
regulations) by multiplying (x) the highest rate of tax for corporations under
section 11 of the Code, by (y) the net income generated by the assets that
caused the failure for the period beginning on the first date of the failure and
ending on the date the REIT has disposed of the assets (or otherwise satisfies
the requirements).
Gross Income Tests. For
each calendar year, we must satisfy two separate tests based on the composition
of our gross income, as defined under our method of accounting, or the Gross
Income Tests.
The 75% Gross Income
Test. At least 75% of our gross income for the taxable year
(excluding gross income from prohibited transactions) must result from (1) rents
from real property, (2) interest on obligations secured by mortgages on real
property or on interests in real property, (3) gains from the sale or other
disposition of real property (including interests in real property and interests
in mortgages on real property) other than property held primarily for sale
to customers in the ordinary course of our trade or business, (4) dividends from
other qualifying REITs and gain (other than gain from prohibited transactions)
from the sale of shares of other qualifying REITs, (5) other specified
investments relating to real property or mortgages thereon, and (6) for a
limited time, temporary investment income (as described under the 75% Asset Test
above). We refer to this requirement as the 75% Gross Income Test. We
intend to invest funds not otherwise invested in real properties in cash sources
or other liquid investments which will allow us to qualify under the 75% Gross
Income Test.
Income
attributable to a lease of real property will generally qualify as “rents from
real property” under the 75% Gross Income Test (and the 95% Gross Income Test
described below) if such lease is respected as a true lease for U.S. federal
income tax purposes (see – “Characterization of Property Leases”) and subject to
the rules discussed below. Rent from a particular tenant will not
qualify if we, or an owner of 10% or more of our stock, directly or indirectly,
owns 10% or more of the voting stock or the total number of shares of all
classes of stock in, or 10% or more of the assets or net profits of, the tenant
(subject to certain exceptions). The portion of rent attributable to
personal property rented in connection with real property will not qualify,
unless the portion attributable to personal property is 15% or less of the total
rent received under, or in connection with, the lease.
Generally,
rent will not qualify if it is based in whole, or in part, on the income or
profits of any person from the underlying property. However, rent will not fail
to qualify if it is based on a fixed percentage (or designated varying
percentages) of receipts or sales, including amounts above a base amount so long
as the base amount is fixed at the time the lease is entered into, the
provisions are in accordance with normal business practice and the arrangement
is not an indirect method for basing rent on income or profits.
If a REIT
operates or manages a property or furnishes or renders certain “impermissible
services” to the tenants at the property, and the income derived from the
services exceeds 1% of the total amount received by that REIT with respect to
the property, then no amount received by the REIT with respect to the property
will qualify as “rents from real property.” Impermissible services are services
other than services “usually or customarily rendered” in connection with the
rental of real property and not otherwise considered “rendered to the occupant.”
For these purposes, the income that a REIT is considered to receive from the
provision of “impermissible services” will not be less than 150% of the cost of
providing the service. If the amount so received is 1% or less of the total
amount received by us with respect to the property, then only the income from
the impermissible services will not qualify as “rents from real property.”
However, this rule generally will not apply if such services are provided to
tenants through an independent contractor from whom we derive no revenue, or
though a TRS. With respect to this rule, tenants will receive some
services in connection with their leases of the real properties. Our intention
is that the services to be provided are those usually or customarily rendered in
connection with the rental of space, and therefore, providing these services
will not cause the rents received with respect to the properties to fail to
qualify as rents from real property for purposes of the 75% Gross Income Test
(and the 95% Gross Income Test described below). The board of directors intends
to hire qualifying independent contractors or to utilize our TRSs to render
services which it believes, after consultation with our tax advisors, are not
usually or customarily rendered in connection with the rental of
space.
In
addition, we have represented that, with respect to our leasing activities, we
will not (1) charge rent for any property that is based in whole or in part on
the income or profits of any person (excluding rent based on a percentage of
receipts or sales, as described above), (2) charge rent that will be
attributable to personal property in an amount greater than 15% of the total
rent received under the applicable lease, or (3) enter into any lease with a
related party tenant.
Amounts
received as rent from a TRS are not excluded from rents from real property by
reason of the related party rules described above, if the activities of the TRS
and the nature of the properties it leases meet certain requirements. The TRSs
will pay regular corporate rates on any income they earn. In
addition, the TRS rules limit the deductibility of interest paid or accrued by a
TRS to its parent REIT to assure that the TRS is subject to an appropriate level
of corporate taxation. Further, the rules impose a 100% excise tax on
transactions between a TRS and its parent REIT or the REIT’s tenants whose terms
are not on an arm’s-length basis.
It is
possible that we will be paid interest on loans secured by real property. All
interest income qualifies under the 95% Gross Income Test, and interest on loans
secured by real property qualifies under the 75% Gross Income Test, provided in both cases, that
the interest does not depend, in whole or in part, on the income or profits of
any person (excluding amounts based on a fixed percentage of receipts or sales).
If a loan is secured by both real property and other property, the interest on
it may nevertheless qualify under the 75% Gross Income Test if the amount of the
loan does not exceed the fair market value of the real property at the time of
the loan commitment. All of our loans secured by real property will be
structured this way. Therefore, income generated through any investments in
loans secured by real property should be treated as qualifying income under the
75% Gross Income Test.
The 95% Gross Income
Test. In addition to deriving 75% of our gross income from the
sources listed above, at least 95% of our gross income (excluding gross income
from prohibited transactions) for the taxable year must be derived from (1)
sources which satisfy the 75% Gross Income Test, (2) dividends, (3) interest, or
(4) gain from the sale or disposition of stock or other securities that are not
assets held primarily for sale to customers in the ordinary course of our trade
or business. We refer to this requirement as the 95% Gross Income
Test. It is important to note that dividends and interest on
obligations not collateralized by an interest in real property qualify under the
95% Gross Income Test, but not under the 75% Gross Income Test. We intend to
invest funds not otherwise invested in properties in cash sources or other
liquid investments which will allow us to qualify under the 95% Gross Income
Test.
Our share
of income from the properties will primarily give rise to rental income and
gains on sales of the properties, substantially all of which will generally
qualify under the 75% Gross Income and 95% Gross Income
Tests. However, we may establish a TRS in order to engage on a
limited basis in acquiring and promptly reselling short- and medium-term net
lease assets for immediate gain. The gross income generated by our TRS would not
be included in our gross income. However, any dividends from our TRS to us would
be included in our gross income and qualify for the 95% Gross Income Test, but
not the 75% Gross Income Test.
If we
fail to satisfy either the 75% Gross Income or 95% Gross Income Tests for any
taxable year, we may retain our qualification as a REIT for such year if we
satisfy the IRS that (1) the failure was due to reasonable cause and not due to
willful neglect, (2) we attach to our return a schedule describing the nature
and amount of each item of our gross income, and (3) any incorrect information
on such schedule was not due to fraud with intent to evade U.S. federal income
tax. If this relief provision is available, we would remain subject to tax equal
to the greater of the amount by which we failed the 75% Gross Income Test or the
95% Gross Income Test, as applicable, multiplied by a fraction meant to reflect
our profitability.
Annual Distribution
Requirements. In addition to the other tests described above,
we are required to distribute dividends (other than capital gain dividends) to
our stockholders each year in an amount at least equal to the excess of: (1) the
sum of: (a) 90% of our REIT taxable income (determined without regard to the
deduction for dividends paid and by excluding any net capital gain); and (b) 90%
of the net income (after tax) from foreclosure property; less (2) the sum of
some types of items of non-cash income. Whether sufficient amounts have been
distributed is based on amounts paid in the taxable year to which they relate,
or in the following taxable year if we: (1) declared a dividend before the due
date of our tax return (including extensions); (2) distribute the dividend
within the 12-month period following the close of the taxable year (and not
later than the date of the first regular dividend payment made after such
declaration); and (3) file an election with our tax return. Additionally,
dividends that we declare in October, November or December in a given year
payable to stockholders of record in any such month will be treated as having
been paid on December 31st of that year so long as the dividends are actually
paid during January of the following year. In order for distributions to be
counted as satisfying the annual distribution requirements for REITs, and to
provide us with a REIT-level tax deduction, the distributions must not be
“preferential dividends.” A dividend is not a preferential dividend
if the distribution is (1) pro rata among all outstanding shares of stock within
a particular class, and (2) in accordance with the preferences among different
classes of stock as set forth in our organizational documents. If we fail to
meet the annual distribution requirements as a result of an adjustment to our
U.S. federal income tax return by the IRS, or under certain other circumstances,
we may cure the failure by paying a “deficiency dividend” (plus penalties and
interest to the IRS) within a specified period.
If we do
not distribute 100% of our REIT taxable income, we will be subject to U.S.
federal income tax on the undistributed portion. We also will be subject to an
excise tax if we fail to currently distribute sufficient income. In order to
make the “required distribution” with respect to a calendar year and avoid the
excise tax, we must distribute the sum of (1) 85% of our REIT ordinary income
for the calendar year, (2) 95% of our REIT capital gain net income for the
calendar year, and (3) the excess, if any, of the grossed up required
distribution (as defined in the Code) for the preceding calendar year over the
distributed amount for that preceding calendar year. Any excise tax liability
would be equal to 4% of the difference between the amount required to be
distributed and the amount actually distributed and would not be deductible by
us.
We intend
to pay sufficient dividends each year to satisfy the annual distribution
requirements and avoid U.S. federal income and excise taxes on our earnings;
however, it may not always be possible to do so. It is possible that we may not
have sufficient cash or other liquid assets to meet the annual distribution
requirements due to tax accounting rules and other timing
differences. Other potential sources of non-cash taxable income
include:
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“residual
interests” in REMICs or taxable mortgage
pools;
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loans
or mortgage-backed securities held as assets that are issued at a discount
and require the accrual of taxable economic interest in advance of receipt
in cash; and
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loans
on which the borrower is permitted to defer cash payments of interest,
distressed loans on which we may be required to accrue taxable interest
income even though the borrower is unable to make current servicing
payments in cash., and debt securities purchased at a
discount.
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We will
closely monitor the relationship between our REIT taxable income and cash flow,
and if necessary to comply with the annual distribution requirements, will
attempt to borrow funds to fully provide the necessary cash flow or to pay
dividends in the form of taxable in-kind distributions of property, including
taxable stock dividends.
Failure to
Qualify. If we fail to qualify, for U.S. federal income tax
purposes, as a REIT in any taxable year, we may be eligible for relief
provisions if the failures are due to reasonable cause and not willful neglect
and if a penalty tax is paid with respect to each failure to satisfy the
applicable requirements. If the applicable relief provisions are not available
or cannot be met, we will not be able to deduct our dividends and will be
subject to U.S. federal income tax (including any applicable alternative minimum
tax) on our taxable income at regular corporate rates, thereby reducing cash
available for distributions. In such event, all distributions to stockholders
(to the extent of our current and accumulated earnings and profits) will be
taxable as ordinary divident income. This “double taxation” results from
our failure to qualify as a REIT. Unless entitled to relief under specific
statutory provisions, we will not be eligible to elect REIT qualification for
the four taxable years following the year during which qualification was
lost.
Recordkeeping Requirements.
We are required to maintain records and request on an annual basis
information from specified stockholders. These requirements are
designed to assist us in determining the actual ownership of our outstanding
stock and maintaining our qualification as a REIT.
Prohibited
Transactions. As discussed above, we will be subject to a 100%
U.S. federal income tax on any net income derived from “prohibited
transactions.” Net income derived from prohibited transactions arises
from the sale or exchange of property held for sale to customers in the ordinary
course of our business which is not foreclosure property. There is an exception
to this rule for the sale of property that:
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is
a real estate asset under the 75% Asset
Test;
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generally
has been held for at least two
years;
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has
aggregate expenditures which are includable in the basis of the property
not in excess of 30% of the net selling
price;
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in
some cases, was held for production of rental income for at least two
years;
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in
some cases, substantially all of the marketing and development
expenditures were made through an independent contractor;
and
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when
combined with other sales in the year, either does not cause the REIT to
have made more than seven sales of property during the taxable year
(excluding sales of foreclosure property or in connection with an
involuntary conversion) or occurs in a year when the REIT disposes of less
than 10% of its assets (measured by U.S. federal income tax basis or fair
market value, and ignoring involuntary dispositions and sales of
foreclosure property).
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Although
we will eventually sell each of the properties, our primary intention in
acquiring and operating the properties is the production of rental income and we
do not expect to hold any property for sale to customers in the ordinary course
of our business. The 100% tax will not apply to gains from the sale of property
that is held through a TRS or other taxable corporation, although such income
will be subject to tax in the hands of the corporation at regular corporate
income tax rates. As a general matter, any condominium conversions we might
undertake must satisfy these restrictions to avoid being “prohibited
transactions,” which will limit the annual number of transactions.
Characterization of Property
Leases. We have acquired and intend to acquire and own
commercial properties subject to net leases. We have and currently intend to
structure our leases so that they qualify as true leases for U.S. federal income
tax purposes. For example, with respect to each lease, we generally expect
that:
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our
operating partnership and the lessee will intend for their relationship to
be that of a lessor and lessee, and such relationship will be documented
by a lease agreement;
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the
lessee will have the right to exclusive possession and use and quiet
enjoyment of the properties covered by the lease during the term of the
lease;
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the
lessee will bear the cost of, and will be responsible for, day-to-day
maintenance and repair of the properties other than the cost of certain
capital expenditures, and will dictate through the property managers, who
will work for the lessee during the terms of the leases, and how the
properties will be operated and
maintained;
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the
lessee will bear all of the costs and expenses of operating the
properties, including the cost of any inventory used in their operation,
during the term of the lease, other than the cost of certain furniture,
fixtures and equipment, and certain capital
expenditures;
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the
lessee will benefit from any savings and will bear the burdens of any
increases in the costs of operating the properties during the term of the
lease;
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in
the event of damage or destruction to a property, the lessee will be at
economic risk because it will bear the economic burden of the loss in
income from operation of the properties subject to the right, in certain
circumstances, to terminate the lease if the lessor does not restore the
property to its prior condition;
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the
lessee will
indemnify the lessor against all liabilities imposed on the lessor during
the term of the lease by reason of (A) injury to persons or damage to
property occurring at the properties or (B) the lessee’s use, management,
maintenance or repair of the
properties;
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the
lessee will be obligated to pay, at a minimum, substantial base rent for
the period of use of the properties under the
lease;
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the
lessee will stand to incur substantial losses or reap substantial gains
depending on how successfully it, through the property managers, who work
for the lessees during the terms of the leases, operates the
properties;
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we
expect that each lease that we enter into, at the time we enter into it
(or at any time that any such lease is subsequently renewed or extended)
will enable the tenant to derive a meaningful profit, after expenses and
taking into account the risks associated with the lease, from the
operation of the properties during the term of its leases;
and
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upon
termination of each lease, the applicable property will be expected to
have a remaining useful life equal to at least 20% of its expected useful
life on the date the lease is entered into, and a fair market value equal
to at least 20% of its fair market value on the date the lease was entered
into.
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If,
however, the IRS were to recharacterize our leases as service contracts or
partnership agreements, rather than true leases, or disregarded altogether for
tax purposes, all or part of the payments that we receive from the lessees would
not be considered rent and might not otherwise satisfy the various requirements
for qualification as “rents from real property.” In that case, we
would not be able to satisfy either the 75% or 95% gross income tests and, as a
result, could lose our REIT qualification.
Tax
Aspects of Investments in Partnerships
General. We
anticipate holding direct or indirect interests in one or more partnerships,
including the operating partnership. We intend to operate as an Umbrella
Partnership REIT, or UPREIT, which is a structure whereby we would own a direct
interest in the operating partnership, and the operating partnership would, in
turn, own the properties and may possibly own interests in other non-corporate
entities that own properties. Such non-corporate entities would generally be
organized as limited liability companies, partnerships or trusts and would
either be disregarded for U.S. federal income tax purposes (if the operating
partnership were the sole owner) or treated as partnerships for U.S. federal
income tax purposes.
The
following is a summary of the U.S. federal income tax consequences of our
investment in the operating partnership. This discussion should also generally
apply to any investment by us in a property partnership or other non-corporate
entity.
A
partnership (that is not a publicly traded partnership taxed as a corporation)
is not subject to tax as an entity for U.S. federal income tax purposes. Rather,
partners are allocated their allocable share of the items of income, gain, loss,
deduction and credit of the partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive any distributions from
the partnership. We will be required to take into account our allocable share of
the foregoing items for purposes of the various REIT gross income and asset
tests, and in the computation of our REIT taxable income and U.S. federal income
tax liability. Further, there can be no assurance that distributions from the
operating partnership will be sufficient to pay the tax liabilities resulting
from an investment in the operating partnership.
Generally,
an entity with two or more members formed as a partnership or limited liability
company under state law will be taxed as a partnership for U.S. federal income
tax purposes unless it specifically elects otherwise. Because the operating
partnership was formed as a partnership under state law for U.S. federal income
tax purposes, the operating partnership will be treated as a partnership, if it
has two or more partners, or disregarded entity, if it is treated as having one
partner. We intend that interests in the operating partnership (and any
partnership invested in by the operating partnership) will fall within one of
the “safe harbors” for the partnership to avoid being classified as a publicly
traded partnership. However, our ability to satisfy the requirements of some of
these safe harbors depends on the results of actual operations and accordingly
no assurance can be given that any such partnership will at all times satisfy
one of such safe harbors. We reserve the right to not satisfy any safe harbor.
Even if a partnership is a publicly traded partnership, it generally will not be
treated as a corporation if at least 90% of its gross income each taxable year
is from certain sources, which generally include rents from real property and
other types of passive income. We believe that our operating partnership has had
an will have sufficient qualifying income so that it would be taxed as a
partnership, even if it were treated as a publicly traded
partnership.
If for
any reason the operating partnership (or any partnership invested in by the
operating partnership) is taxable as a corporation for U.S. federal income tax
purposes, the character of our assets and items of gross income would change,
and as a result, we would most likely be unable to satisfy the applicable REIT
requirements under U.S. federal income tax laws discussed above. In addition,
any change in the status of any partnership may be treated as a taxable event,
in which case we could incur a tax liability without a related cash
distribution. Further, if any partnership was treated as a corporation, items of
income, gain, loss, deduction and credit of such partnership would be subject to
corporate income tax, and the partners of any such partnership would be treated
as stockholders, with distributions to such partners being treated as
dividends.
Anti-abuse
Treasury Regulations have been issued under the partnership provisions of the
Code that authorize the IRS, in some abusive transactions involving
partnerships, to disregard the form of a transaction and recast it as it deems
appropriate. The anti-abuse regulations apply where a partnership is utilized in
connection with a transaction (or series of related transactions) with a
principal purpose of substantially reducing the present value of the partners’
aggregate U.S. federal tax liability in a manner inconsistent with the intent of
the partnership provisions. The anti-abuse regulations contain an example in
which a REIT contributes the proceeds of a public offering to a partnership in
exchange for a general partnership interest. The limited partners contribute
real property assets to the partnership, subject to liabilities that exceed
their respective aggregate bases in such property. The example concludes that
the use of the partnership is not inconsistent with the intent of the
partnership provisions, and thus, cannot be recast by the IRS. However, the
anti-abuse regulations are extraordinarily broad in scope and are applied based
on an analysis of all the facts and circumstances. As a result, we cannot assure
you that the IRS will not attempt to apply the anti-abuse regulations to us. Any
such action could potentially jeopardize our qualification as a REIT and
materially affect the tax consequences and economic return resulting from an
investment in us.
Income Taxation of Partnerships and
their Partners. Although a partnership agreement will
generally determine the allocation of a partnership’s income and losses among
the partners, such allocations may be disregarded for U.S. federal income tax
purposes under Section 704(b) of the Code and the Treasury Regulations. If any
allocation is not recognized for U.S. federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners’
economic interests in the partnership. We believe that the allocations of
taxable income and loss in the operating partnership agreement comply with the
requirements of Section 704(b) of the Code and the Treasury
Regulations. For a description of allocations by the operating
partnership to the partners, see the section entitled “Summary of Our Operating
Partnership Agreement” in this prospectus.
In some
cases, special allocations of net profits or net losses will be required to
comply with the U.S. federal income tax principles governing partnership tax
allocations. Additionally, pursuant to Section 704(c) of the Code,
income, gain, loss and deduction attributable to property contributed to the
operating partnership in exchange for units must be allocated in a manner so
that the contributing partner is charged with, or benefits from, the unrealized
gain or loss attributable to the property at the time of contribution. The
amount of such unrealized gain or loss is generally equal to the difference
between the fair market value and the adjusted basis of the property at the time
of contribution. These allocations are designed to eliminate book-tax
differences by allocating to contributing partners lower amounts of depreciation
deductions and increased taxable income and gain attributable to the contributed
property than would ordinarily be the case for economic or book purposes. With
respect to any property purchased by the operating partnership, such property
will generally have an initial tax basis equal to its fair market value, and
accordingly, Section 704(c) will not apply, except as described further below in
this paragraph. The application of the principles of Section 704(c) in tiered
partnership arrangements is not entirely clear. Accordingly, the IRS may assert
a different allocation method than the one selected by the operating partnership
to cure any book-tax differences. In certain circumstances, we create book-tax
differences by adjusting the values of properties for economic or book purposes
and generally the rules of Section 704(c) of the Code would apply to such
differences as well.
For U.S.
federal income tax purposes, our depreciation deductions generally will be
computed using the straight-line method. Commercial buildings, structural
components and improvements are generally depreciated over 40 years. Shorter
depreciation periods apply to other properties. Some improvements to land are
depreciated over 15 years. With respect to such improvements, however, taxpayers
may elect to depreciate these improvements over 20 years using the straight-line
method. For properties contributed to the operating partnership, depreciation
deductions are calculated based on the transferor’s basis and depreciation
method. Because depreciation deductions are based on the transferor’s
basis in the contributed property, the operating partnership generally would be
entitled to less depreciation than if the properties were purchased in a taxable
transaction. The burden of lower depreciation will generally fall first on the
contributing partner, but also may reduce the depreciation allocated to other
partners.
Gain on
the sale or other disposition of depreciable property is characterized as
ordinary income (rather than capital gain) to the extent of any depreciation
recapture. Buildings and improvements depreciated under the straight-line method
of depreciation are generally not subject to depreciation recapture unless the
property was held for less than one year. However, individuals, trusts and
estates that hold shares either directly or through a pass-through entity may be
subject to tax on the disposition on such assets at a rate of 25% rather than at
the normal capital gains rate, to the extent that such assets have been
depreciated.
Some
expenses incurred in the conduct of the operating partnership’s activities may
not be deducted in the year they were paid. To the extent this occurs, the
taxable income of the operating partnership may exceed its cash receipts for the
year in which the expense is paid. As discussed above, the costs of acquiring
properties must generally be recovered through depreciation deductions over a
number of years. Prepaid interest and loan fees, and prepaid management fees are
other examples of expenses that may not be deducted in the year they were
paid.
Taxation
of U.S. Stockholders
Taxation of Taxable U.S.
Stockholders. As long as we qualify as a REIT,
distributions paid to our U.S. stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends, or for tax
years beginning before January 1, 2011, qualified dividend income) will be
ordinary income. Generally, for purposes of this discussion, a “U.S.
Stockholder” is a person (other than a partnership or entity treated as a
partnership for U.S. federal income tax purposes) that is, for U.S. federal
income tax purposes:
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an
individual citizen or resident of the United States for U.S. federal
income tax purposes;
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a
corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States, any state thereof or
the District of Columbia;
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an
estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
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a
trust if (1) a court within the United States is able to exercise primary
supervision over its administration and one or more U.S. persons have the
authority to control all substantial decisions of the trust or (2) the
trust has a valid election in effect under current Treasury Regulations to
be treated as a U. S. person.
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If a
partnership or entity treated as a partnership for U.S. federal income tax
purposes holds our stock, the U.S. federal income tax treatment of a partner
generally will depend upon the status of the partner and the activities of the
partnership. A partner of a partnership holding our common stock
should consult its own tax advisor regarding the U.S. federal income tax
consequences to the partner of the acquisition, ownership and disposition of our
stock by the partnership.
Distributions
in excess of current and accumulated earnings and profits are treated first as a
tax-deferred return of capital to the U.S. Stockholder, reducing the U.S.
Stockholder’s tax basis in his or her common stock by the amount of such
distribution, and then as capital gain. Because our earnings and profits are
reduced for depreciation and other non-cash items, it is possible that a portion
of each distribution will constitute a tax-deferred return of capital.
Additionally, because distributions in excess of earnings and profits reduce the
U.S. Stockholder’s basis in our stock, this will increase the stockholder’s gain
on any subsequent sale of the stock.
Distributions
that are designated as capital gain dividends will be taxed as long-term capital
gain to the extent they do not exceed our actual net capital gain for the
taxable year, without regard to the period for which the U.S. Stockholder that
receives such distribution has held its stock. However, corporate stockholders
may be required to treat up to 20% of some types of capital gain dividends as
ordinary income. We also may decide to retain, rather than distribute, our net
capital gain and pay any tax thereon. In such instances, U.S. Stockholders would
include their proportionate shares of such gain in income as long-term capital
gain, receive a credit on their returns for their proportionate share of our tax
payments, and increase the tax basis of their shares of stock by the after-tax
amount of such gain.
With
respect to U.S. Stockholders who are taxed at the rates applicable to
individuals, for taxable years beginning before January 1, 2011, we may elect to
designate a portion of our distributions paid to such U.S. Stockholders as
“qualified dividend income.” A portion of a distribution that is
properly designated as qualified dividend income is taxable to non-corporate
U.S. Stockholders as capital gain, provided that the U.S. Stockholder has held
the common stock with respect to which the distribution is made for more than 60
days during the 121 day period beginning on the date that is 60 days before the
date on which such common stock became ex-dividend with respect to the relevant
distribution. The maximum amount of our distributions eligible to be
designated as qualified dividend income for a taxable year is equal to the sum
of:
(1) the
qualified dividend income received by us during such taxable year from C
corporations (including any TRSs);
(2) the
excess of any “undistributed” REIT taxable income recognized during the
immediately preceding year over the U.S. federal income tax paid by us with
respect to such undistributed REIT taxable income; and
(3) the
excess of any income recognized during the immediately preceding year
attributable to the sale of a built-in-gain asset that was acquired in a
carry-over basis transaction from a non-REIT corporation or had appreciated at
the time our REIT election became effective over the U.S. federal income tax
paid by us with respect to such built in gain.
Generally,
dividends that we receive will be treated as qualified dividend income for
purposes of (1) above if the dividends are received from a regular, domestic C
corporation, such as any TRSs, and specified holding period and other
requirements are met.
Dividend
income is characterized as “portfolio” income under the passive loss rules and
cannot be offset by a stockholder’s current or suspended passive losses.
Corporate stockholders cannot claim the dividends-received deduction for such
dividends unless we lose our REIT qualification. Although U.S. Stockholders
generally will recognize taxable income in the year that a distribution is
received, any distribution we declare in October, November or December of any
year and is payable to a U.S. Stockholder of record on a specific date in any
such month will be treated as both paid by us and received by the U.S.
Stockholder on December 31st of the year it was declared even if paid by us
during January of the following calendar year. Because we are not a pass-through
entity for U.S. federal income tax purposes, U.S. Stockholders may not use any
of our operating or capital losses to reduce their tax liabilities.
We have
the ability to declare a large portion of a dividend in shares of our stock. As
long as a portion of such dividend is paid in cash (which portion can be as low
as 10% for a REIT’s taxable years ending on or before December 31, 2011) and
certain requirements are met, the entire distribution will be treated as a
dividend for U.S. federal income tax purposes. As a result, U.S. Stockholders
will be taxed on 100% of the dividend in the same manner as a cash dividend,
even though most of the dividend was paid in shares of our stock. In general,
any dividend on shares of our preferred stock will be taxable as a dividend,
regardless of whether any portion is paid in stock.
In
general, the sale of our common stock held for more than 12 months will produce
long-term capital gain or loss. All other sales will produce short-term gain or
loss. In each case, the gain or loss is equal to the difference between the
amount of cash and fair market value of any property received from the sale and
the U.S. Stockholder’s basis in the common stock sold. However, any loss from a
sale or exchange of common stock by a U.S. Stockholder who has held such stock
for six months or less generally will be treated as a long-term capital loss, to
the extent that the U.S. Stockholder treated our distributions as long-term
capital gain. The use of capital losses is subject to
limitations.
For
taxable years beginning before January 1, 2011, the maximum tax rate applicable
to individuals and certain other noncorporate taxpayers on net capital gain
recognized on the sale or other disposition of shares has been reduced from 20%
to 15%, and the maximum marginal tax rate payable by them on dividends received
from corporations that are subject to a corporate level of tax has been reduced.
Except in limited circumstances, as discussed above, this reduced tax rate will
not apply to dividends paid by us.
Taxation of Tax-Exempt Stockholders.
U.S. tax-exempt entities, including qualified employee
pension and profit sharing trusts and individual retirement accounts, generally
are exempt from U.S. federal income taxation. However, they are
subject to taxation on their unrelated business taxable income, or
UBTI. While many investments in real estate may generate UBTI, the
IRS has ruled that dividend distributions from a REIT to a tax-exempt entity do
not constitute UBTI. Based on that ruling, our distributions to a
U.S. Stockholder that is a domestic tax-exempt entity should not constitute UBTI
unless such U.S. Stockholder borrows funds (or otherwise incurs acquisition
indebtedness within the meaning of the Code) to acquire its common shares, or
the common shares are otherwise used in an unrelated trade or business of the
tax-exempt entity. Furthermore, part or all of the income or gain recognized
with respect to our stock held by certain domestic tax-exempt entities including
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts and qualified group legal service plans (all of which are exempt
from U.S. federal income taxation under Sections 501(c)(7), (9), (17) or (20) of
the Code), may be treated as UBTI.
Special
rules apply to the ownership of REIT shares by some tax-exempt pension trusts.
If we would be “closely-held” (discussed above with respect to the share
ownership tests) because the stock held by tax-exempt pension trusts was viewed
as being held by the trusts rather than by their respective beneficiaries,
tax-exempt pension trusts owning more than 10% by value of our stock may be
required to treat a percentage of our dividends as UBTI. This rule applies if:
(1) at least one tax-exempt pension trust owns more than 25% by value of our
shares, or (2) one or more tax-exempt pension trusts (each owning more than 10%
by value of our shares) hold in the aggregate more than 50% by value of our
shares. The percentage treated as UBTI is our gross income (less direct
expenses) derived from an unrelated trade or business (determined as if we were
a tax-exempt pension trust) divided by our gross income from all sources (less
direct expenses). If this percentage is less than 5%, however, none of the
dividends will be treated as UBTI. Because of the restrictions in our charter
regarding the ownership concentration of our common stock, we believe that a
tax-exempt pension trust should not become subject to these rules. However,
because our common shares may become publicly traded, we can give no assurance
of this.
Prospective
tax-exempt purchasers should consult their own tax advisors and financial
planners as to the applicability of these rules and consequences to their
particular circumstances.
Backup Withholding and Information
Reporting. We will report to our U.S. Stockholders and the IRS
the amount of dividends paid during each calendar year and the amount of any tax
withheld. Under the backup withholding rules, a U.S. Stockholder may
be subject to backup withholding at the current rate of 28% with respect to
dividends paid, unless the U.S. Stockholder (1) is a corporation or comes within
other exempt categories and, when required, demonstrates this fact or (2)
provides a taxpayer identification number or social security number, certifies
under penalties of perjury that such number is correct and that such U.S.
Stockholder is not subject to backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. A U.S.
Stockholder that does not provide his or her correct taxpayer identification
number or social security number may also be subject to penalties imposed by the
IRS. In addition, we may be required to withhold a portion of capital
gain distribution to any U.S. Stockholder who fails to certify its non foreign
status.
Backup
withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be allowed as a refund or a credit against such
U.S. Stockholder's U.S. federal income tax liability, provided the required
information is furnished to the IRS.
For
taxable years beginning after December 31, 2012, a U.S. withholding
tax at a 30% rate will be imposed on dividends and proceeds of sale in respect
of our common stock received by U.S. Stockholders who own their stock
through foreign accounts or foreign intermediaries if certain disclosure
requirements related to U.S. accounts or ownership are not satisfied. We
will not pay any additional amounts in respect to any amounts
withheld.
Taxation
of Non-U.S. Stockholders
General. The
rules governing the U.S. federal income taxation of Non-U.S. Stockholders are
complex, and as such, only a summary of such rules is provided in this
prospectus. Non-U.S. investors should consult with their own tax advisors and
financial planners to determine the impact that U.S. federal, state and local
income tax or similar laws will have on such investors as a result of an
investment in our REIT. A “Non-U.S. Stockholder” means a person
(other than a partnership or entity treated as a partnership for U.S. federal
income tax purposes) that is not a U.S. Stockholder.
Distributions — In General.
Distributions paid by us that are not attributable to gain
from our sales or exchanges of U.S. real property interests and not designated
by us as capital gain dividends will be treated as dividends of ordinary income
to the extent that they are made out of our current or accumulated earnings and
profits. Such dividends to Non-U.S. Stockholders ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend unless an
applicable tax treaty reduces or eliminates that tax. Under some treaties,
however, lower rates generally applicable to dividends do not apply to dividends
from REITs. If income from the investment in the common shares is treated as
effectively connected with the Non-U.S. Stockholder’s conduct of a U.S. trade or
business, the Non-U.S. Stockholder generally will be subject to a tax at the
graduated rates applicable to ordinary income, in the same manner as U.S.
stockholders are taxed with respect to such dividends (and also may be subject
to the 30% branch profits tax in the case of a stockholder that is a foreign
corporation that is not entitled to any treaty exemption). In general, Non-U.S.
Stockholders will not be considered to be engaged in a U.S. trade or business
solely as a result of their ownership of our stock. Dividends in excess of our
current and accumulated earnings and profits will not be taxable to a
stockholder to the extent they do not exceed the adjusted basis of the
stockholder’s shares. Instead, they will reduce the adjusted basis of such
shares. To the extent that such dividends exceed the adjusted basis of a
Non-U.S. Stockholder’s shares, they will give rise to tax liability if the
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale
or disposition of his shares, as described in the “Sale of Shares” portion of
this Section below.
Distributions Attributable to Sale
or Exchange of Real Property. Distributions that are
attributable to gain from our sales or exchanges of U.S. real property interests
will be taxed to a Non-U.S. Stockholder as if such gain were effectively
connected with a U.S. trade or business. Non-U.S. Stockholders would thus be
taxed at the normal capital gain rates applicable to U.S. Stockholders, and
would be subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals. Also, such dividends
may be subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Stockholder not entitled to any treaty exemption. However, generally a capital
gain dividend from a REIT is not treated as effectively connected income for a
Non-U.S. Stockholder if (1) the distribution is received with respect to a class
of stock that is regularly traded on an established securities market located in
the U.S.; and (2) the Non-U.S. Stockholder does not own more than 5% of the
class of stock at any time during the one year period ending on the date of such
distribution. However, it is not anticipated that our
shares will be “regularly traded” on an established securities market for the
foreseeable future, and therefore, this exception is not expected to
apply.
U.S. Federal Income Tax Withholding
on Distributions. For U.S. federal income tax
withholding purposes, we will generally withhold tax at the rate of 30% on the
amount of any distribution (other than distributions designated as capital gain
dividends) made to a Non-U.S. Stockholder, unless the Non-U.S. Stockholder
provides us with appropriate documentation (1) evidencing that such Non-U.S.
Stockholder is eligible for an exemption or reduced rate under an applicable
income tax treaty, generally an IRS Form W-8BEN (in which case we will withhold
at the lower treaty rate) or (2) claiming that the dividend is effectively
connected with the Non-U.S. Stockholder’s conduct of a trade or business within
the U.S., generally an IRS Form W-8ECI (in which case we will not withhold tax).
We are also generally required to withhold tax at the rate of 35% on the portion
of any dividend to a Non-U.S. Stockholder that is or could be designated by us
as a capital gain dividend, to the extent attributable to gain on a sale or
exchange of an interest in U.S. real property. Such withheld amounts of tax do
not represent actual tax liabilities, but rather, represent payments in respect
of those tax liabilities described in the preceding two paragraphs. Therefore,
such withheld amounts are creditable by the Non-U.S. Stockholder against its
actual U.S. federal income tax liabilities, including those described in the
preceding two paragraphs. The Non-U.S. Stockholder would be entitled to a refund
of any amounts withheld in excess of such Non-U.S. Stockholder’s actual U.S.
federal income tax liabilities, provided that the Non-U.S.
Stockholder files applicable returns or refund claims with the IRS.
Sales of
Shares. Gain recognized by a Non-U.S. Stockholder upon a
sale of shares generally will not be subject to U.S. federal income taxation,
provided that: (1) such
gain is not effectively connected with the conduct by such Non-U.S. Stockholder
of a trade or business within the U.S.; (2) the Non-U.S. Stockholder is an
individual and is not present in the U.S. for 183 days or more during the
taxable year and certain other conditions apply; and (3) (A) our REIT is
“domestically controlled,” which generally means that less than 50% in value of
our shares continues to be held directly or indirectly by foreign persons during
a continuous five year period ending on the date of disposition or, if shorter,
during the entire period of our existence, or (B) our common shares are
“regularly traded” on an established securities market and the selling
Non-U.S. Stockholder has not held more than 5% of our outstanding common
shares at any time during the five-year period ending on the date of the
sale.
We cannot
assure you that we will qualify as “domestically controlled”. If we were not
domestically controlled, a Non-U.S. Stockholder’s sale of common shares would be
subject to tax, unless the common shares were regularly traded on an established
securities market and the selling Non-U.S. Stockholder has not directly, or
indirectly, owned during the five-year period ending on the date of sale more
than 5% in value of our common shares. However, it is not anticipated that our
common shares will be “regularly traded” on an established market. If the gain
on the sale of shares were to be subject to taxation, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. stockholders with respect to such
gain, and the purchaser of such common shares may be required to withhold 10% of
the gross purchase price.
If the
proceeds of a disposition of common stock are paid by or through a U.S. office
of a broker-dealer, the payment is generally subject to information reporting
and to backup withholding unless the disposing Non-U.S. Stockholder certifies as
to its name, address and non-U.S. status or otherwise establishes an exemption.
Generally, U.S. information reporting and backup withholding will not apply to a
payment of disposition proceeds if the payment is made outside the U.S. through
a foreign office of a foreign broker-dealer. Under Treasury Regulations, if the
proceeds from a disposition of common stock paid to or through a foreign office
of a U.S. broker-dealer or a non-U.S. office of a foreign broker-dealer that is
(1) a “controlled foreign corporation” for U.S. federal income tax purposes, (2)
a person 50% or more of whose gross income from all sources for a three-year
period was effectively connected with a U.S. trade or business, (3) a foreign
partnership with one or more partners who are U.S. persons and who, in the
aggregate, hold more than 50% of the income or capital interest in the
partnership, or (4) a foreign partnership engaged in the conduct of a trade or
business in the U.S., then (A) backup withholding will not apply unless the
broker-dealer has actual knowledge that the owner is not a Non-U.S. Stockholder,
and (B) information reporting will not apply if the Non-U.S. Stockholder
certifies its non-U.S. status and further certifies that it has not been, and at
the time the certificate is furnished reasonably expects not to be, present in
the U.S. for a period aggregating 183 days or more during each calendar year to
which the certification pertains. Prospective foreign purchasers should consult
their tax advisors and financial planners concerning these rules.
Legislation
that was signed into law by President Obama on March 18, 2010, generally
imposes, effective for payments made after December 31, 2012, a withholding tax
of 30% on dividends from, and the gross proceeds of a disposition of, common
stock paid to certain foreign entities unless various information reporting
requirements are satisfied. Such withholding tax will generally apply
to non-U.S. financial institutions, which is generally defined for this purpose
as any non-U.S. entity that (i) accepts deposits in the ordinary course of a
banking or similar business, (ii) is engaged in the business of holding
financial assets for the account of others, or (iii) is engaged or holds itself
out as being engaged primarily in the business of investing, reinvesting, or
trading in securities, partnership interests, commodities, or any interest in
such assets. Non-U.S. Stockholders are encouraged to consult their
tax advisors regarding the implications of this legislation on their investment
in our common stock.
Other
Tax Considerations
State, Local and Foreign
Taxes. We and you may be subject to state, local or
foreign taxation in various jurisdictions, including those in which we transact
business or reside. Our and your state, local and foreign tax treatment may not
conform to the U.S. federal income tax consequences discussed above. Any foreign
taxes incurred by us would not pass through to stockholders as a credit against
their U.S. federal income tax liability. You should consult your own tax
advisors and financial planners regarding the effect of state, local and foreign
tax laws on an investment in the common shares.
Legislative
Proposals. You should recognize that our and your
present U.S. federal income tax treatment may be modified by legislative,
judicial or administrative actions at any time, which may be retroactive in
effect. The rules dealing with U.S. federal income taxation are constantly under
review by Congress, the IRS and the Treasury Department, and statutory changes
as well as promulgation of new regulations, revisions to existing statutes, and
revised interpretations of established concepts occur frequently. We are not
currently aware of any pending legislation that would materially affect our or
your taxation as described in this prospectus. You should, however, consult your
advisors concerning the status of legislative proposals that may pertain to a
purchase of our common shares.
ERISA
CONSIDERATIONS
General
The
following is a summary of certain additional considerations associated with an
investment in our shares by tax-qualified pension, stock bonus or profit-sharing
plans, employee benefit plans described in Section 3(3) and subject to Title I
of ERISA, annuities described in Section 403(a) or (b) of the Internal Revenue
Code, an individual retirement account or annuity described in Sections 408 or
408A of the Internal Revenue Code, an Archer MSA described in Section 220(d) of
the Internal Revenue Code, a health savings account described in Section 223(d)
of the Internal Revenue Code, or a Coverdell education savings account described
in Section 530 of the Internal Revenue Code, which are referred to as Plans and
IRAs, as applicable. This summary is based on provisions of ERISA and
the Internal Revenue Code, including amendments thereto through the date of this
prospectus, and relevant regulations and opinions issued by the Department of
Labor and the Internal Revenue Service through the date of this prospectus and
is designed only to provide a general conceptual understanding of certain basic
issues relevant to a Plan or IRA investor. We cannot assure you that
adverse tax decisions or legislative, regulatory or administrative changes that
would significantly modify the statements expressed herein will not
occur. Any such changes may or may not apply to transactions entered
into prior to the date of their enactment.
Our
management has attempted to structure us in such a manner that we will be an
attractive investment vehicle for Plans and IRAs. However, in
considering an investment in our shares, those involved with making such an
investment decision should consider applicable provisions of the Internal
Revenue Code and ERISA. While each of the ERISA and Internal Revenue
Code issues discussed below may not apply to all Plans and IRAs, individuals
involved with making investment decisions with respect to Plans and IRAs should
carefully review the rules and exceptions described below, and determine their
applicability to their situation. This discussion should not be
considered legal advice and prospective investors are required to consult their
own legal advisors on these matters.
In
general, individuals making investment decisions with respect to Plans and IRAs
should, at a minimum, consider:
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whether
the investment is in accordance with the documents and instruments
governing such Plan or IRA;
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whether
the investment satisfies the prudence and diversification and other
fiduciary requirements of ERISA, if
applicable;
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whether
the investment will result in UBTI to the Plan or IRA (see “Material U.S.
Federal Income Tax Considerations — Treatment of Tax-Exempt
Stockholders”);
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whether
there is sufficient liquidity for the Plan or IRA, considering the minimum
and other distribution requirements under the Internal Revenue Code and
the liquidity needs of such Plan or IRA, after taking this investment into
account;
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the
need to value the assets of the Plan or IRA annually or more frequently;
and
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whether
the investment would constitute or give rise to a non-exempt prohibited
transaction under ERISA or the Internal Revenue Code, if
applicable.
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Additionally,
individuals making investment decisions with respect to Plans and IRAs must
remember that ERISA requires that the assets of an employee benefit plan must
generally be held in trust.
Minimum
and Other Distribution Requirements — Plan Liquidity
Potential
Plan or IRA investors who intend to purchase our shares should consider the
limited liquidity of an investment in our shares as it relates to the minimum
distribution requirements under the Internal Revenue Code, if applicable, and as
it relates to other distributions (such as, for example, cash out distributions)
that may be required under the terms of the Plan or IRA from time to
time. If the shares are held in an IRA or Plan and, before we sell
our properties, mandatory or other distributions are required to be made to the
participant or beneficiary of such IRA or Plan, pursuant to the Internal Revenue
Code, then this could require that a distribution of the shares be made in kind
to such participant or beneficiary or that a rollover of such shares be made to
an IRA or other plan, which may not be permissible under the terms and
provisions of IRA or Plan. Even if permissible, a distribution of
shares in kind to a participant or beneficiary of an IRA or Plan must be
included in the taxable income of the recipient for the year in which the shares
are received at the then current fair market value of the shares, even though
there would be no corresponding cash distribution with which to pay the income
tax liability arising because of the distribution of shares. See
“Risk Factors — U.S. Federal Income Tax Risks.” The fair market value of any
such distribution-in-kind can be only an estimated value per share because no
public market for our shares exists or is likely to develop. See
“Annual Valuation Requirement” below. Further, there can be no
assurance that such estimated value could actually be realized by a stockholder
because estimates do not necessarily indicate the price at which our shares
could be sold. Also, for distributions subject to mandatory income
tax withholding under Section 3405 or other tax withholding provisions of the
Internal Revenue Code, the trustee of a Plan may have an obligation, even in
situations involving in-kind distributions of shares, to liquidate a portion of
the in-kind shares distributed in order to satisfy such withholding obligations,
although there might be no market for such shares. There may also be
similar state and/or local tax withholding or other tax obligations that should
be considered.
Annual
or More Frequent Valuation Requirement
Fiduciaries
of Plans may be required to determine the fair market value of the assets of
such Plans on at least an annual basis and, sometimes, as frequently as
quarterly. If the fair market value of any particular asset is not
readily available, the fiduciary is required to make a good faith determination
of that asset’s value. Also, a trustee or custodian of an IRA must
provide an IRA participant and the Internal Revenue Service with a statement of
the value of the IRA each year. However, currently, neither the
Internal Revenue Service nor the Department of Labor has promulgated regulations
specifying how “fair market value” should be determined.
Unless
and until our shares are listed on the New York Stock Exchange or NASDAQ Stock
Market it is not expected that a public market for our shares will
develop. To assist fiduciaries of Plans subject to the annual
reporting requirements of ERISA and IRA trustees or custodians to prepare
reports relating to an investment in our shares, we intend to provide reports of
our quarterly and annual determinations of the current estimated share value to
those fiduciaries (including IRA trustees and custodians) who identify
themselves to us and request the reports. Until 18 months after the
completion of any subsequent offerings of our shares, we intend to use the
offering price of shares in our most recent offering as the per share net asset
value (unless we have made a special distribution to stockholders of net sales
proceeds from the sale of one or more properties prior to the date of
determination of net asset value, in which case we will use the offering price
less the per share amount of the special distribution). Beginning 18
months after the completion of the last offering of our shares, our board of
directors will determine the value of the properties and our other assets based
on such information as our board determines appropriate, which may or may not
include independent valuations of our properties or of our enterprise as a
whole.
We
anticipate that we will provide annual reports of our determination of value (a)
to IRA trustees and custodians not later than January 15 of each year, and (b)
to other Plan fiduciaries within 75 days after the end of each calendar
year. Each determination may be based upon valuation information
available as of October 31 of the preceding year, updated, however, for any
material changes occurring between October 31 and December 31.
There can
be no assurance, however, with respect to any estimate of value that we prepare,
that:
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the
estimated value per share would actually be realized by our stockholders
upon liquidation, because these estimates do not necessarily indicate the
price at which properties can be
sold;
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our
stockholders would be able to realize estimated net asset values if they
were to attempt to sell their shares, because no public market for our
shares exists or is likely to develop;
or
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that
the value, or method used to establish value, would comply with ERISA or
Internal Revenue Code requirements described
above.
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Fiduciary
Obligations — Prohibited Transactions
Any
person identified as a “fiduciary” with respect to a Plan has duties and
obligations under ERISA as discussed herein. For purposes of ERISA,
any person who exercises any authority or control with respect to the management
or disposition of the assets of a Plan is considered to be a fiduciary of such
Plan. Further, many transactions between a Plan or an IRA and a
“party-in-interest” or a “disqualified person” with respect to such Plan or IRA
are prohibited by ERISA and/or the Internal Revenue Code. ERISA also
requires generally that the assets of Plans be held in trust.
In the
event that our properties and other assets were deemed to be assets of a Plan or
IRA, referred to herein as “plan assets,” our directors would, and employees of
our affiliates might be deemed fiduciaries of any Plans or IRAs investing as
stockholders. If this were to occur, certain contemplated
transactions between us and our directors and employees of our affiliates could
be deemed to be “prohibited transactions.” Additionally, ERISA’s fiduciary
standards applicable to investments by Plans would extend to our directors and
possibly employees of our affiliates as Plan fiduciaries with respect to
investments made by us.
Plan
Assets—Definition
Prior to
the passage of the Pension Protection Act of 2006 (the “PPA”), neither ERISA nor
the Internal Revenue Code contained a definition of Plan
Assets. After the passage of the PPA, Section 3(42) of ERISA now
defines “plan assets” in accordance with Department of Labor regulations with
certain express exceptions. A Department of Labor regulation,
referred to in this discussion as the Plan Asset Regulation, as modified or
deemed to be modified by the express exceptions noted in the PPA, provides
guidelines as to whether, and under what circumstances, the underlying assets of
an entity will be deemed to constitute Plan Assets. Under the Plan
Asset Regulation, the assets of an entity in which a Plan or IRA makes an equity
investment will generally be deemed to be assets of such Plan or IRA unless the
entity satisfies one of the exceptions to this general
rule. Generally, the exceptions require that the investment in the
entity be one of the following:
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in
securities issued by an investment company registered under the Investment
Company Act;
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in
“publicly offered securities,” defined generally as interests that are
“freely transferable,” “widely held” and registered with the Securities
and Exchange Commission;
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in
an “operating company,” which includes “venture capital operating
companies” and “real estate operating companies;”
or
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in
which equity participation by “benefit plan investors” is not
significant.
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Plan
Assets — Registered Investment Company Exception
The
shares we are offering will not be issued by a registered investment
company. Therefore we do not anticipate that we will qualify for the
exception for investments issued by a registered investment
company.
Publicly
Offered Securities Exemption
As noted
above, if a Plan acquires “publicly offered securities,” the assets of the
issuer of the securities will not be deemed to be Plan Assets under the Plan
Asset Regulation. The definition of publicly offered securities
requires that such securities be “widely held,” “freely transferable” and
satisfy registration requirements under federal securities laws.
Under the
Plan Asset Regulation, a class of securities will meet the registration
requirements under federal securities laws if they are (a) part of a class of
securities registered under section 12(b) or 12(g) of the Exchange Act, or (b)
part of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of securities of
which such security is a part is registered under the Exchange Act within 120
days (or such later time as may be allowed by the Securities and Exchange
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. We anticipate
that we will meet the registration requirements under the Plan Asset
Regulation. Also under the Plan Asset Regulation, a class of
securities will be “widely held” if it is held by 100 or more persons
independent of the issuer. We anticipate that this requirement will
be easily met.
Although
our shares are intended to satisfy the registration requirements under this
definition, and we expect that our securities will be “widely-held”, the “freely
transferable” requirement must also be satisfied in order for us to qualify for
the “publicly offered securities” exception.
The Plan
Asset Regulation provides that “whether a security is `freely transferable’ is a
factual question to be determined on the basis of all relevant facts and
circumstances.” Our shares are subject to certain restrictions on
transferability typically found in REITs, and are intended to ensure that we
continue to qualify for U.S. federal income tax treatment as a
REIT. The Plan Asset Regulation provides, however, that where the
minimum investment in a public offering of securities is $10,000 or less, the
presence of a restriction on transferability intended to prohibit transfers that
would result in a termination or reclassification of the entity for state or
federal tax purposes will not ordinarily affect a determination that such
securities are “freely transferable.” The minimum investment in our shares is
less than $10,000. Thus, the restrictions imposed in order to
maintain our status as a REIT should not prevent the shares from being deemed
“freely transferable.” Therefore, we anticipate that we will meet the “publicly
offered securities” exception, although there are no assurances that we will
qualify for this exception.
Plan
Assets — Operating Company Exception
If we are
deemed not to qualify for the “publicly offered securities” exemption, the Plan
Asset Regulation also provides an exception with respect to securities issued by
an “operating company,” which includes “venture capital operating companies” and
“real estate operating companies.” To constitute a venture capital operating
company, 50% or more of the assets of the entity must be invested in “venture
capital investments.” A venture capital investment is an investment in an
operating company (other than a venture capital operating company but including
a real estate operating company) as to which the entity has or obtains direct
management rights. To constitute a real estate operating company, 50%
or more of the assets of an entity must be invested in real estate which is
managed or developed and with respect to which such entity has the right to
substantially participate directly in the management or development
activities.
While the
Plan Asset Regulation and relevant opinions issued by the Department of Labor
regarding real estate operating companies are not entirely clear as to whether
an investment in real estate must be “direct”, it is common practice to insure
that an investment is made either (a) “directly” into real estate, (b) through
wholly-owned subsidiaries, or (c) through entities in which all but a de minimis
interest is separately held by an affiliate solely to comply with the minimum
safe harbor requirements established by the Internal Revenue Service for
classification as a partnership for federal tax purposes. We have
structured ourselves in a manner in that should enable us to meet the venture
capital operating company exception and our operating partnership to meet the
real estate operating company exception.
Notwithstanding
the foregoing, 50% of our operating partnership’s investments must be in real
estate over which it maintains the right to substantially participate in the
management and development activities. An example in the Plan Asset
Regulation indicates that if 50% or more of an entity’s properties are subject
to long-term leases under which substantially all management and maintenance
activities with respect to the properties are the responsibility of the lessee,
such that the entity merely assumes the risk of ownership of income-producing
real property, then the entity may not be eligible for the “real estate
operating company” exception. By contrast, a second example in the
Plan Asset Regulation indicates that if 50% or more of an entity’s investments
are in shopping centers in which individual stores are leased for relatively
short periods to various merchants, as opposed to long-term leases where
substantially all management and maintenance activities are the responsibility
of the lessee, then the entity will likely qualify as a real estate operating
company. The second example further provides that the entity may
retain contractors, including affiliates, to conduct the management of the
properties so long as the entity has the responsibility to supervise and the
authority to terminate the contractors. We intend to use contractors
over which we have the right to supervise and the authority to
terminate. Due to the uncertainty of the application of the standards
set forth in the Plan Asset Regulation, there can be no assurance as to our
ability to structure our operations, or the operations of our operating
partnership, as the case may be, to qualify for the “venture capital operating
company” and “real estate operating company” exceptions.
Plan
Assets — Not Significant Investment Exception
The Plan
Asset Regulation provides that equity participation in an entity by benefit plan
investors is “significant” if at any time 25% or more of the value of any class
of equity interests is held by benefit plan investors. As modified by
the PPA, a “benefit plan investor” is now defined to mean an employee benefit
plan subject to Part 4 of Subtitle B of Title I of ERISA, any plan to which
Section 4975 of the Internal Revenue Code applies and any entity whose
underlying assets include plan assets by reason of such a plan’s investment in
such entity. In the event we determine that we fail to meet the
“publicly offered securities” exception, as a result of a failure to sell an
adequate number of shares or otherwise, and we cannot ultimately establish that
we are an operating company, we intend to restrict ownership of each class of
equity interests held by benefit plan investors to an aggregate value of less
than 25% and thus qualify for the exception for investments in which equity
participation by benefit plan investors is not significant.
Consequences
of Holding Plan Assets
In the
event that our underlying assets were treated by the Department of Labor as Plan
Assets, our management would be treated as fiduciaries with respect to each Plan
or IRA stockholder, and an investment in our shares might expose the fiduciaries
of the Plan or IRA to co-fiduciary liability under ERISA for any breach by our
management of the fiduciary duties mandated under ERISA. Further, if
our assets are deemed to be Plan Assets, an investment by a Plan or IRA in our
shares might be deemed to result in an impermissible commingling of Plan Assets
with other property.
If our
management or affiliates were treated as fiduciaries with respect to Plan or IRA
stockholders, the prohibited transaction restrictions of ERISA and/or the
Internal Revenue Code would apply to any transaction involving our
assets. These restrictions could, for example, require that we avoid
transactions with entities that are affiliated with our affiliates or us or
restructure our activities in order to obtain an administrative exemption from
the prohibited transaction restrictions. Alternatively, we might have
to provide Plan or IRA stockholders with the opportunity to sell their shares to
us or we might dissolve or terminate.
Prohibited
Transactions
Generally,
both ERISA and the Internal Revenue Code prohibit Plans and IRAs from engaging
in certain transactions involving Plan Assets with specified parties, such as
sales or exchanges or leasing of property, loans or other extensions of credit,
furnishing goods or services, or transfers to, or use of, Plan
Assets. The specified parties are referred to as
“parties-in-interest” under ERISA and as “disqualified persons” under the
Internal Revenue Code. These definitions generally include “persons
providing services” to the Plan or IRA, as well as employer sponsors of the Plan
or IRA, fiduciaries and certain other individuals or entities affiliated with
the foregoing.
A person
generally is a fiduciary with respect to a Plan or IRA for these purposes if,
among other things, the person has discretionary authority or control with
respect to Plan Assets or provides investment advice for a fee with respect to
Plan Assets. Under Department of Labor regulations, a person will be
deemed to be providing investment advice if that person renders advice as to the
advisability of investing in our shares, and that person regularly provides
investment advice to the Plan or IRA pursuant to a mutual agreement or
understanding that such advice will serve as the primary basis for investment
decisions, and that the advice will be individualized for the Plan or IRA based
on its particular needs. Thus, if we are deemed to hold Plan Assets,
our management could be characterized as fiduciaries with respect to such
assets, and each would be deemed to be a party-in-interest under ERISA and a
disqualified person under the Internal Revenue Code with respect to investing
Plans and IRAs. Whether or not we are deemed to hold Plan Assets, if
we or our affiliates are affiliated with a Plan or IRA investor, we might be a
disqualified person or party-in-interest with respect to such Plan or IRA
investor, resulting in a prohibited transaction merely upon investment by such
Plan or IRA in our shares.
Prohibited
Transactions — Consequences
ERISA
forbids Plans from engaging in non-exempt prohibited
transactions. Fiduciaries of a Plan that allow a non-exempt
prohibited transaction to occur will breach their fiduciary responsibilities
under ERISA, and may be liable for any damage sustained by the Plan, as well as
civil (and criminal, if the violation was willful) penalties. If it
is determined by the Department of Labor or the Internal Revenue Service that a
non-exempt prohibited transaction has occurred, any disqualified person or
party-in-interest involved with the prohibited transaction would be required to
reverse or unwind the transaction and, for a Plan, compensate the Plan for any
loss resulting therefrom. Additionally, the Internal Revenue Code
requires that a disqualified person involved with a non-exempt prohibited
transaction must pay an excise tax equal to a percentage of the “amount
involved” in the transaction for each year in which the transaction remains
uncorrected. The percentage is generally 15%, but potentially is
increased to 100% if the prohibited transaction is not corrected
promptly. For IRAs, if an IRA engages in a non-exempt prohibited
transaction, the tax-exempt status of the IRA may be lost.
Reporting
Based on
certain revisions to the Form 5500 Annual Return (“Form 5500”) that generally
became effective on January 1, 2009, Plans may be required to report certain
compensation paid by us (or by third parties) to our service providers as
“reportable indirect compensation” on Schedule C to Form 5500. To the
extent any compensation arrangements described herein constitute reportable
indirect compensation, any such descriptions (other than the descriptions of
compensation for which there is no specific formula disclosed to calculate
compensation) are intended to satisfy the disclosure requirements for the
alternative reporting option for “eligible indirect compensation,” as defined
for purposes of Schedule C to the Form 5500.
DESCRIPTION
OF SHARES
We were
formed under the laws of the state of Maryland. The rights of our
stockholders are governed by Maryland law as well as our charter and
bylaws. The following summary of the terms of our common stock is
only a summary, and you should refer to the Maryland General Corporation Law and
our charter and bylaws for a full description. The following summary
is qualified in its entirety by the more detailed information contained in our
charter and bylaws. Copies of our charter and bylaws are available
upon request.
Our
charter authorizes us to issue up to 250,000,000 shares of stock, of which
240,000,000 shares are designated as common stock at $0.01 par value per share
and 10,000,000 shares are designated as preferred stock at $0.01 par value per
share. As of July 27, 2010, 33,045,410 shares of our common stock
were issued and outstanding, held by 8,604 stockholders, and no shares of
preferred stock were issued and outstanding. Our board of directors,
with the approval of a majority of the entire board of directors and without any
action taken by our stockholders, may amend our charter from time to time to
increase or decrease the aggregate number of our authorized shares or the number
of shares of any class or series that we have authority to issue without any
action by our stockholders.
Our
charter also contains a provision permitting our board of directors, by
resolution, to classify or reclassify any unissued preferred stock into one or
more classes or series by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications, or terms or conditions of repurchase of any new
class or series of stock, subject to certain restrictions, including the express
terms of any class or series of stock outstanding at the time. We
believe that the power to classify or reclassify unissued shares of stock and
thereafter issue the classified or reclassified shares provides us with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other needs that might arise. We will not offer
preferred stock to promoters except on the same terms as it is offered to all
other existing stockholders or to new stockholders.
Our
charter and bylaws contain certain provisions that could make it more difficult
to acquire control of our company by means of a tender offer, a proxy contest or
otherwise. These provisions are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of our company to negotiate first with our
board of directors. We believe that these provisions increase the
likelihood that proposals initially will be on more attractive terms than would
be the case in their absence and facilitate negotiations that may result in
improvement of the terms of an initial offer that might involve a premium price
for our common stock or otherwise be in the best interest of our
stockholders. See “Risk Factors — Risks Related to an Investment in
American Realty Capital Trust, Inc.”
Pursuant
to the NASAA REIT Guidelines, at the first meeting of the stockholders on
January 22, 2008, the charter was reviewed and ratified by a majority vote of
the directors and independent directors.
To the
extent that the Maryland General Corporation Law conflicts with the provisions
set forth in the NASAA REIT Guidelines, the NASAA REIT Guidelines will control,
unless the provisions of the Maryland General Corporations Law are mandatory
under Maryland law.
Common
Stock
Subject
to any preferential rights of any other class or series of stock and to the
provisions of our charter regarding the restriction on the transfer of our
stock, the holders of common stock are entitled to such dividends or other
distributions as may be authorized from time to time by our board of directors
out of legally available funds and declared by us and, upon our liquidation, are
entitled to receive all assets available for distribution to our
stockholders. Upon issuance for full payment in accordance with the terms
of this offering, all common stock issued in the offering will be fully paid and
non-assessable. Holders of common stock will not have preemptive
rights, which means that they will not have an automatic option to purchase any
new shares that we issue, or preference, conversion, exchange, sinking fund,
redemption or appraisal rights. Shares of our common stock have equal
distribution, liquidation and other rights.
In order
to ensure adherence to the suitability standards, requisite criteria must be
met, as set forth in the Subscription Agreement in the form attached hereto as
Appendix A. In addition, our advisor and dealer manager must make
every reasonable effort to determine that the purchase of our shares (including
the purchase of our shares through the automatic purchase plan) is a suitable
and appropriate investment for an investor. In making this
determination, our advisor and dealer manager will rely on relevant information
provided by the investor, including information as to the investor’s age,
investment objectives, investment experience, income, net worth, financial
situation, other investments, and any other pertinent
information. Executed Subscription Agreements will be maintained in
our records for six years.
Preferred
Stock
Our
charter authorizes our board of directors to, without stockholder approval,
designate and issue one or more classes or series of preferred stock and to set
or change the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption for each such class or series of
preferred stock. Because our board of directors has the power to
establish the preferences and rights of each class or series of preferred stock,
it may afford the holders of any series or class of preferred stock preferences,
powers and rights senior to the rights of holders of common stock. If
we ever create and issue preferred stock with a distribution preference over
common stock, payment of any distribution preferences of outstanding preferred
stock would reduce the amount of funds available for the payment of
distributions on the common stock. Further, holders of preferred
stock are normally entitled to receive a preference payment in the event we
liquidate, dissolve or wind up before any payment is made to the common
stockholders, likely reducing the amount common stockholders would otherwise
receive upon such an occurrence. In addition, under certain
circumstances, the issuance of preferred stock may delay, prevent, render more
difficult or tend to discourage the following:
|
·
|
a
merger, offer, or proxy contest;
|
|
·
|
the
assumption of control by a holder of a large block of our securities;
or
|
|
·
|
the
removal of incumbent management.
|
Also, our
board of directors, without stockholder approval, may issue preferred stock with
voting and conversion rights that could adversely affect the holders of common
stock.
We
currently have no preferred stock issued or outstanding. Our board of
directors has no present plans to issue shares of preferred stock, but it may do
so at any time in the future without stockholder approval.
Dilution
of Our Shares
Existing
stockholders who purchased shares of our common stock in our initial offering
will experience dilution of their equity investment during our follow-on
offering. As of July 27, 2010, we have raised gross offering proceeds
of $328.7 million pursuant to our initial offering. Our stockholders
who own 100% of our outstanding common shares when we commenced our follow-on
offering will own approximately 81% of our outstanding common shares upon
completion of our follow-on offering, assuming we raise the maximum offering of
$350,000,000. See “Risks Related to Our Organizational
Structure.” Your interests may be diluted if we issue or offer
additional shares.
Meetings
and Special Voting Requirements
Subject
to our charter restrictions on ownership and transfer of our stock and the terms
of each class or series of stock, each holder of stock is entitled at each
meeting of stockholders to cast one vote per share owned by such stockholder on
those matters submitted to a vote of stockholders, including the election of
directors. There is no cumulative voting in the election of our board
of directors, which means that the holders of a majority of shares of our
outstanding stock entitled to vote in the election of directors generally can
elect all of the directors then standing for election and the holders of the
remaining shares of stock will not be able to elect any directors.
Under
Maryland law, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business, unless approved by the affirmative vote of stockholders entitled to
cast at least two-thirds of the votes entitled to be cast on the
matter. However, a Maryland corporation may provide in its charter
for approval of these matters by a lesser percentage, but not less than a
majority of all of the votes entitled to be cast on the matter. Our
charter provides for approval of these matters by the affirmative vote of a
majority of the votes entitled to be cast.
Also,
because our operating assets are held by our subsidiaries, these subsidiaries
may be able to merge or sell all or substantially all of their assets without
the approval of our stockholders.
An annual
meeting of our stockholders will be held each year, at least 30 days after
delivery of our annual report to our stockholders. Special meetings
of stockholders may be called only upon the request of a majority of our
directors, a majority of the independent directors, the president, the chief
executive officer or by our secretary upon the written request of stockholders
holding at least 10% of our outstanding shares. Upon receipt of a
written request of stockholders holding at least 10% of our outstanding shares
stating the purpose of the special meeting, our secretary will provide all of
our stockholders written notice of the meeting and the purpose of such
meeting. The meeting must be held not less than 15 or more than 60
days after the distribution of the notice of meeting. The presence of
stockholders entitled to cast a majority of all the votes entitled to be cast at
the meeting, either in person or by proxy, will constitute a
quorum.
Our
stockholders are entitled to receive a copy of our stockholder list upon
request. The list provided by us will include each stockholder’s
name, address and telephone number, if available, and the number of shares owned
by each stockholder and will be sent within ten days of the receipt by us of the
request. A stockholder requesting a list will be required to pay the
reasonable costs of postage and duplication. Stockholders and their
representatives shall also be given access to our corporate records at
reasonable times. We have the right to request that a requesting
stockholder represent to us that the list and records will not be used to pursue
commercial interests unrelated to the stockholder’s interests in his or her
stock.
If we do
not list shares of our common stock on the New York Stock Exchange or NASDAQ
Stock Market by December 1, 2018, our charter requires that we either (a) seek
stockholder approval of an extension or amendment of this listing deadline, or
(b) seek stockholder approval of the liquidation of the
corporation. If we sought and did not obtain stockholder approval of
an extension or amendment to the listing deadline, our charter requires our
board of directors to adopt a plan of liquidation and begin the orderly
liquidation of our assets pursuant to any applicable provision of the Maryland
General Corporation Law.
Restrictions
on Ownership and Transfer
In order
for us to qualify as a REIT under the Internal Revenue Code, we must meet the
following criteria regarding our stockholders’ ownership of our
shares:
|
·
|
five
or fewer individuals (as defined in the Internal Revenue Code to include
certain tax exempt organizations and trusts) may not own, directly or
indirectly, more than 50% in value of our outstanding shares during the
last half of a taxable year; and
|
|
·
|
100
or more persons must beneficially own our shares during at least 335 days
of a taxable year of twelve months or during a proportionate part of a
shorter taxable year.
|
See
“Material U.S. Federal Income Tax Considerations” for further discussion of this
topic. We may prohibit certain acquisitions and transfers of shares
so as to ensure our initial and continued qualification as a REIT under the
Internal Revenue Code. However, there can be no assurance that this
prohibition will be effective. Our charter provides (subject to
certain exceptions) that no stockholder may own, or be deemed to own by virtue
of the attribution provisions of the Internal Revenue Code, more than 9.8% in
value of the aggregate of our outstanding shares of stock and not more than 9.8%
(in value or in number of shares, whichever is more restrictive) of
any class or series of shares of our stock, which we refer to as the “ownership
limit.”
Our board
of directors, in its sole discretion, may exempt a person from the ownership
limit prospectively or retroactively if our board of directors receives evidence
satisfactory to it that such ownership will not then or in the future jeopardize
our status as a REIT and the person seeking such exemption provides us with
certain representations and undertakings. Also, the restrictions on
transferability and ownership in our charter will not apply if our directors
determine that it is no longer in our best interests to continue to qualify as a
REIT.
Additionally,
our charter further prohibits the transfer or ownership of our stock if such
transfer or ownership:
|
·
|
with
respect to transfers only, results in our stock being owned by fewer than
100 persons;
|
|
·
|
results
in our being “closely held” within the meaning of Section 856(h) of the
Internal Revenue Code; or
|
|
·
|
otherwise
results in our disqualification as a
REIT.
|
Any
attempted transfer of our stock which, if effective, would result in our stock
being owned by fewer than 100 persons will be null and void. In the
event of any attempted transfer of our stock or other event which, if effective,
would result in (a) violation of the ownership limit discussed above, or (b) in
our being “closely held” under Section 856(h) of the Internal Revenue Code or
our otherwise failing to qualify as a REIT, then the number of shares causing
the violation (rounded to the nearest whole share) will be automatically
transferred to a trust for the exclusive benefit of one or more charitable
beneficiaries, and the proposed transferee will not acquire any rights in the
shares. To avoid confusion, these shares so transferred to a
beneficial trust will be referred to in this prospectus as “Excess Securities.”
Excess Securities will remain issued and outstanding shares and will be entitled
to the same rights and privileges as all other shares of the same class or
series. The trustee of the beneficial trust, as holder of the Excess
Securities, will be entitled to receive all distributions authorized by the
board of directors on such securities for the benefit of the charitable
beneficiary. Our charter further entitles the trustee of the
beneficial trust to vote all Excess Securities.
The
trustee of the beneficial trust may select a transferee to whom the Excess
Securities may be sold as long as such sale does not violate the ownership limit
or the other restrictions on ownership and transfer of our
stock. Upon sale of the Excess Securities, the intended transferee
(the transferee of the Excess Securities whose ownership would have violated the
ownership limit or the other restrictions on ownership and transfer of our
stock) will receive from the trustee of the beneficial trust the lesser of such
sale proceeds, or the price per share the intended transferee paid for the
Excess Securities (or, in the case of a gift or devise to the intended
transferee, the price per share equal to the market value per share on the date
of the attempted transfer to the intended transferee). The trustee of
the beneficial trust will distribute to the charitable beneficiary any amount
the trustee receives in excess of the amount to be paid to the intended
transferee.
In
addition, we have the right to purchase any Excess Securities at the lesser of
(a) the price per share paid in the attempted transfer that created the Excess
Securities, or (b) the current market price, until the Excess Securities are
sold by the trustee of the beneficial trust. An intended transferee
must pay, upon demand, to the trustee of the beneficial trust (for the benefit
of the beneficial trust) the amount of any distribution we pay to an intended
transferee on Excess Securities prior to our discovery that such Excess
Securities have been transferred in violation of the provisions of the
charter.
Any
person who (a) acquires or attempts to acquire shares in violation of the
foregoing restrictions on ownership and transfer of our stock, transfers or
receives shares subject to such limitations, or would have owned shares that
resulted in a transfer to a beneficial trust, or (b) proposes or attempts any of
the transactions in clause (a), is required to give us 15 days’ written notice
prior to such transaction. In both cases, such persons must provide
to us such other information as we may request in order to determine the effect,
if any, of such transfer on our status as a REIT. The foregoing
restrictions will continue to apply until our board of directors determines it
is no longer in our best interest to continue to qualify as a
REIT.
The
ownership limit does not apply to the underwriter in a public offering of shares
or to a person or persons exempted from the ownership limit by our board of
directors. Any person who owns 5% or more of the outstanding shares
during any taxable year must deliver a statement or affidavit setting forth the
number of shares beneficially owned, directly or indirectly.
Automatic
Purchase Plan
Investors
who desire to purchase shares in this offering at regular intervals during the
offering period may be able to do so through their participating broker-dealer
or, if they are investing in this offering other than through a participating
broker-dealer, the dealer manager by completing an automatic purchase plan
enrollment form. Participation in the automatic purchase plan is
limited to investors who have already met the minimum purchase requirement in
this offering of $1,000 or the amount required by your state of residence, if
higher. The minimum periodic investment is $100 per
period. The shares will not be issued on a deferred payment
basis. You may elect to make such automatic purchases on a monthly,
quarterly, semi-annual or annual basis. You may elect to have the
money drawn from your account on the 1st or
15th
of the month prescribed based on your periodic purchase election.
We will
provide a confirmation of your purchases under the automatic purchase plan
within five business days after the end of each period in which your investment
is admitted. The confirmation will disclose the following
information:
|
·
|
the
amount of the investment;
|
|
·
|
the
admit date of the investment; and
|
|
·
|
the
number and price of the shares purchased by
you.
|
We will
pay dealer manager fees and selling commissions in connection with sales under
the automatic purchase plan to the same extent that we pay those fees and
commissions on shares sold in this offering outside of the automatic purchase
plan.
You may
terminate your participation in the automatic purchase plan at any time by
providing us with written notice. If you elect to participate in the
automatic purchase plan, you must agree that if at any time you fail to meet the
applicable investor suitability standards or cannot make the other investor
representations set forth in the then-current prospectus or in the subscription
agreement, you will promptly notify us in writing of that fact and your
participation in the plan will terminate. In addition, our advisor
and dealer manager must make every reasonable effort to determine that the
purchase of our shares (including the purchase of our shares through the
automatic purchase plan) is a suitable and appropriate investment for an
investor. In making this determination, our advisor and dealer
manager will rely on relevant information provided by the investor, including
information as to the investor’s age, investment objectives, investment
experience, income, net worth, financial situation, other investments, and any
other pertinent information. Executed Subscription Agreements will be
maintained in our records for six years. See the “Investor
Suitability Standards” section of our Prospectus.
Distribution
Policy and Distributions
As we
have sufficient cash flow available to pay distributions, we intend to pay
regular distributions to our stockholders as described below in this
section. Our real estate investments are described in the “Investment
Objectives and Policies” section herein. Except as described in this
prospectus, we currently have not identified any additional probable real estate
investments. We will not make additional real estate investments
until we identify investment opportunities and raise sufficient capital pursuant
to this offering to do so. Because all of our operations will be
performed indirectly through American Realty Capital Operating Partnership,
L.P., our operating partnership, our ability to pay distributions depends on
American Realty Capital Operating Partnership, L.P.’s ability to pay
distributions to its partners, including to us. In the event that in
the future we do not have enough cash from operations to fund the distribution,
we may borrow, issue additional securities or sell assets in order to fund the
distributions or make the distributions out of net proceeds from this
offering.
Distributions
will be paid to our stockholders when as and if authorized by our board of
directors and declared by us as legally available funds as of the record date
selected by our board of directors. We expect to declare and pay
distributions at least quarterly. Once we have sufficient cash flow,
we may pay distributions monthly or more frequently. We expect to
regularly pay monthly distributions with daily record and declaration dates
unless our results of operations, our general financial condition, general
economic conditions, or other factors inhibit us from doing
so. Distributions will be authorized at the discretion of our board
of directors, which will be directed, in substantial part, by its obligation to
cause us to comply with the REIT requirements of the Internal Revenue
Code. The funds we receive from operations that are available for
distribution may be affected by a number of factors, including the
following:
|
·
|
the
amount of time required for us to invest the funds received in the
offering;
|
|
·
|
our
operating and interest expenses;
|
|
·
|
the
ability of tenants to meet their obligations under the leases associated
with our properties;
|
|
·
|
the
amount of distributions or dividends received by us from our indirect real
estate investments;
|
|
·
|
our
ability to keep our properties
occupied;
|
|
·
|
our
ability to maintain or increase rental rates when renewing or replacing
current leases;
|
|
·
|
capital
expenditures and reserves for such
expenditures;
|
|
·
|
the
issuance of additional shares; and
|
|
·
|
financings
and refinancings.
|
We must
distribute to our stockholders at least 90% of our taxable income each year in
order to meet the requirements for being treated as a REIT under the Internal
Revenue Code. This requirement is described in greater detail in the
“Material U.S. Federal Income Tax Considerations — Requirements For
Qualification as a REIT — Operational Requirements — Annual Distribution
Requirements” section of this prospectus. Our directors may authorize
distributions in excess of this percentage as they deem
appropriate. Because we may receive income from interest or rents at
various times during our fiscal year, distributions may not reflect our income
earned in that particular distribution period, but may be made in anticipation
of cash flow that we expect to receive during a later period and may be made in
advance of actual receipt of funds in an attempt to make distributions
relatively uniform. To allow for such differences in timing between
the receipt of income and the payment of expenses, and the effect of required
debt payments, among other things, could require us to borrow funds from third
parties on a short-term basis, issue new securities, or sell assets to meet the
distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT. These methods of obtaining
funding could affect future distributions by increasing operating costs and
decreasing available cash. In addition, such distributions may
constitute a return of capital. See “Material U.S. Federal Income Tax
Considerations — Requirements for Qualification as a REIT.”
The
payment date for our distributions is the 2nd day following each month-end to
stockholders of record at the close of business each day during the applicable
period. As of July 16, 2010, distributions paid to shareholders totaled $12.3
million. On January 27, 2010, the Board of Directors approved an increase in its
annual cash distribution, paid monthly. Based on a $10.00 share price, this
increase, effective April 1, 2010, results in an annualized distribution rate of
7.0%. As of July 16, 2010 cash used to pay our distributions was partially
generated from funds received from operating activities and fee waivers from our
advisor. Our distributions have not been paid from any other sources. We have
continued to pay distributions to our shareholders each month since our initial
dividend payment. To date, the Company’s distributions have been paid with a
combination of cash flows from operations and the proceeds from the sales of
common stock. There can be no assurance that cash flows from
operations will be sufficient to pay distributions in future
periods. In the event we do not have enough cash to make
distributions in the future, we may borrow, use proceeds from this offering,
issue additional securities or sell assets in order to fund
distributions.
The
following table summarizes the Company’s historical and prospective distribution
rate, reflecting the special distribution and increase to the annual rate
effective April 1, 2010 noted above:
|
|
Annualized
Distribution
Rate
|
|
|
|
May
2008(1)
to December 2008
|
|
|
6.5 |
% |
|
|
8
|
|
January
2009 to March 2010
|
|
|
6.7 |
% |
|
|
15
|
|
Special
Distribution–January 2010(2)
|
|
|
0.5 |
% |
|
|
—
|
|
|
|
|
7.2 |
%(2) |
|
|
|
|
April
2010 to — July 16, 2010
|
|
|
7.0 |
% |
|
|
3
|
|
(1)
|
initial
distribution was paid in May 2008.
|
(2)
|
payable
to shareholder’s of record as of December 31, 2009, resulting in a minimum
distribution rate of 7.2% for an investor who owned a common share of the
Company for the full year ended December 31,
2009.
|
The
Company determined distributions paid to shareholders in 2009 will be reported
as nondividend distributions on Form 1099 for the applicable
period. Accordingly, such distributions are generally not subject to
ordinary income tax in the related period. This tax characterization
is consistent with distributions paid to shareholders in 2008.
The
portion of the distribution that is not subject to tax immediately is considered
a return of capital for tax purposes and will reduce the tax basis of a
shareholder’s investment. This defers a portion of applicable taxes
until the investment is sold or the Company is liquidated, at which time the
shareholder will be taxed at capital gains rates. However, because
each investor’s tax considerations are different, the Company recommends that
investors consult with their tax advisor.
The
following is a chart of monthly distributions declared and paid since the
commencement of the offering:
|
|
Total
|
|
|
Cash
|
|
|
Distribution Reinvestment
Plan
|
|
2008:
|
|
|
|
|
|
|
|
|
|
April
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
May
|
|
|
30,262
|
|
|
|
22,008
|
|
|
|
8,254
|
|
June
|
|
|
49,638
|
|
|
|
35,283
|
|
|
|
14,355
|
|
July
|
|
|
55,042
|
|
|
|
34,788
|
|
|
|
20,254
|
|
August
|
|
|
57,584
|
|
|
|
36,519
|
|
|
|
21,065
|
|
September
|
|
|
61,395
|
|
|
|
39,361
|
|
|
|
22,034
|
|
October
|
|
|
61,425
|
|
|
|
41,078
|
|
|
|
20,347
|
|
November
|
|
|
65,496
|
|
|
|
43,646
|
|
|
|
21,850
|
|
December
|
|
|
64,442
|
|
|
|
42,876
|
|
|
|
21,566
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
$
|
69,263
|
|
|
$
|
46,227
|
|
|
$
|
23,036
|
|
February
|
|
|
76,027
|
|
|
|
50,214
|
|
|
|
25,813
|
|
March
|
|
|
74,915
|
|
|
|
49,020
|
|
|
|
25,895
|
|
April
|
|
|
101,282
|
|
|
|
64,375
|
|
|
|
36,907
|
|
May
|
|
|
128,867
|
|
|
|
78,604
|
|
|
|
50,263
|
|
June
|
|
|
180,039
|
|
|
|
106,741
|
|
|
|
73,298
|
|
July
|
|
|
217,325
|
|
|
|
127,399
|
|
|
|
89,926
|
|
August
|
|
|
290,230
|
|
|
|
177,620
|
|
|
|
112,610
|
|
September
|
|
|
375,926
|
|
|
|
220,165
|
|
|
|
155,761
|
|
October
|
|
|
455,051
|
|
|
|
264,729
|
|
|
|
190,322
|
|
November
|
|
|
563,472
|
|
|
|
328,555
|
|
|
|
234,917
|
|
December
|
|
|
643,125
|
|
|
|
374,715
|
|
|
|
268,410
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
January (1)
|
|
|
1,498,413
|
|
|
|
855,282
|
|
|
|
643,131
|
|
February
|
|
|
865,993
|
|
|
|
484,967
|
|
|
|
381,026
|
|
March
|
|
|
862,117
|
|
|
|
478,895
|
|
|
|
383,222
|
|
April
|
|
|
1,085,719
|
|
|
|
600,607
|
|
|
|
485,112
|
|
May
|
|
|
1,262,558
|
|
|
|
695,838
|
|
|
|
566,720
|
|
June
|
|
|
1,496,075
|
|
|
|
851,779
|
|
|
|
674,296
|
|
(1)
|
Includes
the special distribution paid on January 19, 2010 to shareholders of
record as of December 31, 2009.
|
The
following tables shows the sources for the payment of distributions for the
first quarter of the year ended December 31, 2010 and the years ended December
31, 2009 and 2008 (in thousands):
1st Quarter Year Ended December 31,
2010
|
|
|
|
|
Distributions
paid in cash
|
|
$
|
1,815
|
|
Distributions
reinvested
|
|
|
1,407
|
|
Total
distributions
|
|
$
|
3,222
|
|
Source
of distributions:
|
|
|
|
|
Cash
flows from operations used for distributions
|
|
$
|
2,060
|
|
Proceeds
from issuance of common stock
|
|
|
1,162
|
|
Total
sources
|
|
$
|
3,222
|
|
|
|
1st
Quarter
Year
Ended
December
31, 2010
|
|
Distributions
paid in cash
|
|
$ |
1,821 |
|
Distributions
reinvested
|
|
|
1,407 |
|
Total
distributions
|
|
$ |
3,228 |
|
Source
of distributions:
|
|
|
|
|
Cash
flows from operations used for distributions
|
|
$ |
2,060 |
|
Proceeds
from issuance of common stock
|
|
|
1,168 |
|
Total
sources
|
|
$ |
3,228 |
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
paid in cash
|
|
$ |
145 |
|
|
$ |
250 |
|
|
$ |
526 |
|
|
$ |
967 |
|
Distributions
reinvested
|
|
|
75 |
|
|
|
160 |
|
|
|
358 |
|
|
|
694 |
|
Total
distributions
|
|
$ |
220 |
|
|
$ |
410 |
|
|
$ |
884 |
|
|
$ |
1,661 |
|
Source
of distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operations used for distributions
|
|
$ |
(1,215 |
) |
|
$ |
(3,129 |
) |
|
$ |
828 |
|
|
$ |
990 |
|
Proceeds
from issuance of common stock
|
|
|
1,435 |
|
|
|
3,539 |
|
|
|
56 |
|
|
|
671 |
|
Total
sources
|
|
$ |
220 |
|
|
$ |
410 |
|
|
$ |
884 |
|
|
$ |
1,661 |
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
paid in cash
|
|
$ |
— |
|
|
$ |
57 |
|
|
$ |
111 |
|
|
$ |
127 |
|
Distributions
reinvested
|
|
|
— |
|
|
|
23 |
|
|
|
63 |
|
|
|
64 |
|
Total
distributions
|
|
$ |
— |
|
|
$ |
80 |
|
|
$ |
174 |
|
|
$ |
191 |
|
Source
of distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operations used for distributions
|
|
$ |
— |
|
|
$ |
80 |
|
|
$ |
174 |
|
|
$ |
191 |
|
Proceeds
from issuance of common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
sources
|
|
$ |
— |
|
|
$ |
80 |
|
|
$ |
174 |
|
|
$ |
191 |
|
Stockholder
Liability
The
Maryland General Corporation Law provides that our stockholders:
|
·
|
are
not liable personally or individually in any manner whatsoever for any
debt, act, omission or obligation incurred by us or our board of
directors; and
|
|
·
|
are
under no obligation to us or our creditors with respect to their shares
other than the obligation to pay to us the full amount of the
consideration for which their shares were
issued.
|
Business
Combinations
Under
Maryland law, “business combinations” between a Maryland corporation and an
interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange, or, in
circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities. An interested stockholder is
defined as:
|
·
|
any
person who beneficially owns 10% or more of the voting power of the
corporation’s shares; or
|
|
·
|
an
affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then outstanding voting stock of
the corporation.
|
A person
is not an interested stockholder under the statute if the board of directors
approved in advance the transaction by which he otherwise would have become an
interested stockholder. However, in approving a transaction, the
board of directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the
board.
After the
five-year prohibition, any business combination between the Maryland corporation
and an interested stockholder generally must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at
least:
|
·
|
80%
of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation;
and
|
|
·
|
two-thirds
of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the interested stockholder with whom
or with whose affiliate the business combination is to be effected or held
by an affiliate or associate of the interested
stockholder.
|
These
super-majority vote requirements do not apply if the corporation’s stockholders
receive a minimum price, as defined under Maryland law, for their shares in the
form of cash or other consideration in the same form as previously paid by the
interested stockholder for its shares.
The
statute permits various exemptions from its provisions, including business
combinations that are exempted by the board of directors before the time that
the interested stockholder becomes an interested
stockholder. Pursuant to the statute, our board of directors has
exempted any business combination with American Realty Capital Advisors, LLC or
any affiliate of American Realty Capital Advisors, LLC. Consequently,
the five-year prohibition and the super-majority vote requirements will not
apply to business combinations between us and American Realty Capital Advisors,
LLC or any affiliate of American Realty Capital Advisors, LLC. As a
result, American Realty Capital Advisors, LLC or any affiliate of American
Realty Capital Advisors, LLC may be able to enter into business combinations
with us that may not be in the best interest of our stockholders, without
compliance with the super-majority vote requirements and the other provisions of
the statute.
The
business combination statute may discourage others from trying to acquire
control of us and increase the difficulty of consummating any
offer.
Control
Share Acquisitions
With some
exceptions, Maryland law provides that control shares of a Maryland corporation
acquired in a control share acquisition have no voting rights except to the
extent approved by a vote of stockholders holding two-thirds of the votes
entitled to be cast on the matter, excluding “control shares:”
|
·
|
owned
by the acquiring person;
|
|
·
|
owned
by our officers; and
|
|
·
|
owned
by our employees who are also
directors.
|
“Control
shares” mean voting shares of stock which, if aggregated with all other voting
shares owned by an acquiring person or shares for which the acquiring person can
exercise or direct the exercise of voting power, would entitle the acquiring
person to exercise voting power in the election of directors, generally, within
one of the following ranges of voting power:
|
·
|
one-tenth
or more but less than one-third;
|
|
·
|
one-third
or more but less than a majority;
or
|
|
·
|
a
majority or more of all voting
power.
|
Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A control
share acquisition occurs when, subject to some exceptions, a person directly or
indirectly acquires ownership or the power to direct the exercise of voting
power (except solely by virtue of a revocable proxy) of issued and outstanding
control shares. A person who has made or proposes to make a control
share acquisition, upon satisfaction of some specific conditions, including an
undertaking to pay expenses, may compel our board of directors to call a special
meeting of our stockholders to be held within 50 days of a request to consider
the voting rights of the control shares. If no request for a meeting
is made, we may present the question at any stockholders’ meeting.
If voting
rights are not approved at the meeting or if the acquiring person does not
deliver an acquiring person statement as required by the statute, then, subject
to some conditions and limitations, we may redeem any or all of the control
shares (except those for which voting rights have been previously approved) for
fair value determined, without regard to the absence of voting rights for the
control shares, as of the date of the last control share acquisition by the
acquiror or of any meeting of stockholders at which the voting rights of such
shares are considered and not approved. If voting rights for control
shares are approved at a stockholders meeting and the acquiror becomes entitled
to vote a majority of the shares entitled to vote, all other stockholders may
exercise appraisal rights. The fair value of the shares as determined
for purposes of such appraisal rights may not be less than the highest price per
share paid by the acquiror in the control share acquisition. The
control share acquisition statute does not apply to shares acquired in a merger,
consolidation, or share exchange if we are a party to the transaction or to
acquisitions approved or exempted by our charter or bylaws.
As
permitted by Maryland General Corporation Law, our bylaws contain a provision
exempting from the control share acquisition statute any and all acquisitions of
our stock.
Subtitle
8
Subtitle
8 of Title 3 of the Maryland General Corporation Law permits a Maryland
corporation with a class of equity securities registered under the Exchange Act
and at least three independent directors to elect to be subject, by provision in
its charter or bylaws or a resolution of its board of directors and
notwithstanding any contrary provision in the charter or bylaws, to any or all
of five provisions:
|
·
|
a
two-thirds vote requirement for removing a
director;
|
|
·
|
a
requirement that the number of directors be fixed only by vote of the
directors;
|
|
·
|
a
requirement that a vacancy on the board be filled only by the remaining
directors and for the remainder of the full term of the class of directors
in which the vacancy occurred; and
|
|
·
|
a
majority requirement for the calling of a special meeting of
stockholders.
|
Pursuant
to Subtitle 8, we have elected to provide that vacancies on our board of
directors may be filled only by the a majority of the remaining directors and
any director elected to fill a vacancy may serve for the remainder of the full
term of the directorship in which the vacancy occurred. Through
provisions in our charter and bylaws unrelated to Subtitle 8, we already vest in
the board the exclusive power to fix the number of directorships.
Advance
Notice of Director Nominations and New Business
Our
bylaws provide that with respect to an annual meeting of stockholders,
nominations of individuals for election to the board of directors and the
proposal of business to be considered by stockholders may be made only (a)
pursuant to our notice of the meeting, (b) by the board of directors or (c) by a
stockholder who is entitled to vote at the meeting and who has complied with the
advance notice procedures of the bylaws. With respect to special
meetings of stockholders, only the business specified in our notice of the
meeting may be brought before the meeting. Nominations of individuals
for election to the board of directors at a special meeting may be made only (a)
pursuant to our notice of the meeting, (b) by the board of directors, or (c)
provided that the board of directors has determined that directors will be
elected at the meeting, by a stockholder who is entitled to vote at the meeting
and who has complied with the advance notice provisions of the
bylaws.
Share
Repurchase Program
Our board
of directors has adopted a share repurchase program that enables our
stockholders to sell their shares to us in limited circumstances. Our
share repurchase program permits you to sell your shares back to us after you
have held them for at least one year, subject to the significant conditions and
limitations described below.
During
the term of this follow-on offering and any subsequent public offering of our
shares, the purchase price per share will depend on the length of time you have
held such shares as follows: after one year from the purchase date —
96.25% of the amount you actually paid for each share; and after two years from
the purchase date — 97.75% of the amount you actually paid for each share; and
after three years from the purchase date — 100% of the amount you actually paid
for each share; (in each case, as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to our common
stock). At any time we are engaged in an offering of shares, the per
share price for shares purchased under our repurchase plan will always be equal
to or lower than the applicable per share offering price. Thereafter,
the per share purchase price will be based on the greater of $10.00 or the
then-current net asset value of the shares as determined by our board of
directors (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to our common stock). Our
board of directors will announce any purchase price adjustment and the time
period of its effectiveness as a part of its regular communications with our
stockholders. Our board of directors shall use the following criteria
for determining the net asset value of the shares: value of our
assets (estimated market value) less the estimated market value of our
liabilities, divided by the number of shares. The Board, with advice
from the advisor, (i) will make internal valuations of the market value of its
assets based upon the current capitalization rates of similar properties in the
market, recent transactions for similar properties acquired by the Company and
any extensions, cancellations, modifications or other material events affecting
the leases, changes in rents or other circumstances related to such properties,
(ii) review internal appraisals prepared by the advisor following standard
commercial real estate appraisal practice and (iii) every three years or
earlier, in rotation will have all of the properties appraised by an external
appraiser. Upon the death or disability of a stockholder, upon
request, we will waive the one-year holding requirement. Shares
repurchased in connection with the death or disability of a stockholder will be
repurchased at a purchase price equal to the price actually paid for the shares
during the offering, or if not engaged in the offering, the per share purchase
price will be based on the greater of $10.00 or the then-current net asset value
of the shares as determined by our board of directors (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with respect to
our common stock). In addition, we may waive the holding period in
the event of a stockholder’s bankruptcy or other exigent
circumstances.
On
November 12, 2008, the Company’s board of directors modified the Share
Repurchase Program (“share repurchase plan”) to fund purchases under the share
repurchase plan, not only from the initial offering’s Distribution Reinvestment
Plan (“DRIP”), but also from operating funds of the
Company. Accordingly, purchases under the share repurchase plan,
subject to the terms of the share repurchase plan, may be funded from the
proceeds from the sale of shares under the DRIP, from proceeds of the sale of
shares in a public offering, and with other available allocated operating
funds. However, purchases under the share repurchase plan by the
Company will be limited in any calendar year to 5% of the weighted average
number of shares outstanding during the prior year. The other terms
and conditions of the share repurchase plan remain unchanged.
We will
redeem our shares on the last business day of the month following the end of
each quarter. Requests for repurchases must be received on or prior
to the end of the quarter in order for us to repurchase the shares as of the end
of the next month. You may withdraw your request to have your shares
repurchased at any time prior to the last day of the applicable
quarter. Shares presented for repurchase will continue to earn daily
distributions up to and including the repurchase date.
Our board
of directors may choose to amend, suspend or terminate our share repurchase
program upon 30 days notice at any time. Additionally we will be
required to discontinue sales of shares under the initial offering’s
distribution reinvestment plan on the earlier of August 5, 2012, which is two
years from the effective date of this follow-on offering, or the date we sell
all of the shares registered for sale under the initial offering’s distribution
reinvestment plan, unless we file a new registration statement with the
Securities and Exchange Commission and applicable states. Because the
repurchase of shares will be partially funded with the net proceeds we receive
from the sale of shares under the initial offering’s distribution reinvestment
plan, the discontinuance or termination of the initial offering’s distribution
reinvestment plan may adversely affect our ability to purchase shares under the
share repurchase program. We would notify you of such
developments: (i) in the annual or quarterly reports mentioned above,
or (ii) by means of a separate mailing to you, accompanied by disclosure in a
current or periodic report under the Exchange Act. During this
offering, we would also include this information in a prospectus supplement or
post -effective amendment to the registration statement, as then required under
federal securities laws.
Our share
repurchase program is only intended to provide interim liquidity for
stockholders until a liquidity event occurs, such as listing of the shares on
the New York Stock Exchange or NASDAQ Stock Market, or our merger with a listed
company. The share repurchase program will be terminated if the
shares become listed on a national securities exchange. We cannot
guarantee that a liquidity event will occur.
The
shares we purchase under our share repurchase program will be cancelled and
return to the status of unauthorized but unissued shares. We do not
intend to resell such shares to the public unless such resale is first
registered with the Securities and Exchange Commission under the Securities Act
and under appropriate state securities laws or otherwise conducted in compliance
with such laws.
For the
year ended December 31, 2009, we received requests to redeem 77,759 common
shares pursuant to our share repurchase program. We redeemed 100% of
the redemption requests at an average price per share of $9.91 per
share. We funded share redemptions for the periods noted above from
the cumulative proceeds of the sale of our common shares pursuant to the initial
offering’s distribution reinvestment plan and from operating funds of the
Company.
Restrictions
on Roll-up Transactions
A Roll-up
Transaction is a transaction involving the acquisition, merger, conversion or
consolidation, directly or indirectly, of us and the issuance of securities of
an entity (Roll-up Entity) that is created or would survive after the successful
completion of a Roll-up Transaction. This term does not
include:
|
·
|
a
transaction involving our securities that have been listed on a national
securities exchange for at least 12 months;
or
|
|
·
|
a
transaction involving our conversion to trust, or association form if, as
a consequence of the transaction, there will be no significant adverse
change in stockholder voting rights, the term of our existence,
compensation to American Realty Capital Advisors, LLC, American Realty
Capital II, LLC or our investment
objectives.
|
In
connection with any Roll-up Transaction involving the issuance of securities of
a Roll-up Entity, an appraisal of all of our assets shall be obtained from a
competent independent appraiser. The assets shall be appraised on a
consistent basis, and the appraisal will be based on the evaluation of all
relevant information and will indicate the value of the assets as of a date
immediately prior to the announcement of the proposed Roll-up
Transaction. The appraisal shall assume an orderly liquidation of
assets over a 12-month period. The terms of the engagement of the
independent appraiser shall clearly state that the engagement is for the benefit
of us and our stockholders. A summary of the appraisal, indicating
all material assumptions underlying the appraisal, shall be included in a report
to stockholders in connection with any proposed Roll-up
Transaction.
In
connection with a proposed Roll-up Transaction, the sponsor of the Roll-up
Transaction must offer to stockholders who vote “no” on the proposal the choice
of:
|
(1)
|
accepting
the securities of the Roll-up Entity offered in the proposed Roll-up
Transaction; or
|
|
(2)
|
one
of the following:
|
|
|
remaining
as stockholders and preserving their interests therein on the same terms
and conditions as existed previously,
or
|
|
|
receiving
cash in an amount equal to the stockholder’s pro rata share of the
appraised value of our net assets.
|
We are
prohibited from participating in any Roll-up Transaction:
|
·
|
that
would result in the stockholders having voting rights in a Roll-up Entity
that are less than those provided in our charter and described elsewhere
in this prospectus, including rights with respect to the election and
removal of directors, annual reports, annual and special meetings,
amendment of our charter, and our
dissolution;
|
|
·
|
that
includes provisions that would materially impede or frustrate the
accumulation of shares by any purchaser of the securities of the Roll-up
Entity, except to the minimum extent necessary to preserve the tax status
of the Roll-up Entity, or which would limit the ability of an investor to
exercise the voting rights of its securities of the Roll-up Entity on the
basis of the number of shares held by that
investor;
|
|
·
|
in
which our investor’s rights to access of records of the Roll-up Entity
will be less than those provided in the section of this prospectus
entitled “— Meetings and Special Voting Requirements” above;
or
|
|
·
|
in
which any of the costs of the Roll-up Transaction would be borne by us if
the Roll-up Transaction is not approved by the
stockholders.
|
SUMMARY
OF OFFERING DISTRIBUTION REINVESTMENT PLAN
We have
adopted a distribution reinvestment plan. The following is a summary of our
distribution reinvestment plan.
Investment
of Distributions
We have
adopted a distribution reinvestment plan pursuant to which our stockholders,
and, subject to certain conditions set forth in the plan, any stockholder or
partner of any other publicly offered limited partnership, real estate
investment trust or other real estate program sponsored by our advisor or its
affiliates, may elect to purchase shares of our common stock with our
distributions or distributions from such other programs. We have the discretion
to extend the offering period for the shares being offered pursuant to this
prospectus under our distribution reinvestment plan beyond the termination of
this offering until we have sold all of the shares allocated to the plan through
the reinvestment of distributions. We may also offer shares pursuant to a new
registration statement.
No dealer
manager fees or sales commissions will be paid with respect to shares purchased
pursuant to the distribution reinvestment plan, therefore, we will retain all of
the proceeds from the reinvestment of distributions. Accordingly, substantially
all the economic benefits resulting from distribution reinvestment purchases by
stockholders from the elimination of the dealer manager fee and selling
commissions will inure to the benefit of the participant through the reduced
purchase price.
Pursuant
to the terms of our distribution reinvestment plan the reinvestment agent, which
currently is us, will act on behalf of participants to reinvest the cash
distributions they receive from us. Stockholders participating in the
distribution reinvestment plan may purchase fractional shares. If sufficient
shares are not available for issuance under our distribution reinvestment plan,
the reinvestment agent will remit excess cash distributions to the participants.
Participants purchasing shares pursuant to our distribution reinvestment plan
will have the same rights as stockholders with respect to shares purchased under
the plan and will be treated in the same manner as if such shares were issued
pursuant to our offering.
After the
termination of the offering of our shares registered for sale pursuant to the
distribution reinvestment plan under the this prospectus and any subsequent
offering, we may determine to allow participants to reinvest cash distributions
from us in shares issued by another American Realty Capital-sponsored program
only if all of the following conditions are satisfied:
•
prior to the time of such reinvestment, the participant has received the final
prospectus and any supplements thereto offering interests in the subsequent
American Realty Capital-sponsored program and such prospectus allows investments
pursuant to a distribution reinvestment plan;
• a
registration statement covering the interests in the subsequent American Realty
Capital-sponsored program has been declared effective under the Securities
Act;
•
the offer and sale of such interests are qualified for sale under applicable
state securities laws;
•
the participant executes the subscription agreement included with the prospectus
for the subsequent American Realty Capital-sponsored program; and
•
the participant qualifies under applicable investor suitability standards as
contained in the prospectus for the subsequent American Realty Capital-sponsored
program.
Stockholders
who invest in subsequent American Realty Capital-sponsored programs pursuant to
our distribution reinvestment plan will become investors in such subsequent
American Realty Capital-sponsored program and, as such, will receive the same
reports as other investors in the subsequent American Realty Capital-sponsored
program.
Election
to Participate or Terminate Participation
A
stockholder may become a participant in our distribution reinvestment plan by
making a written election to participate on his or her subscription agreement at
the time he or she subscribes for shares. Any stockholder who has not previously
elected to participate in the distribution reinvestment plan may so elect at any
time by delivering to the reinvestment agent a completed enrollment form or
other written authorization required by the reinvestment agent. Participation in
our distribution reinvestment plan will commence with the next distribution
payable after receipt of the participant’s notice, provided it is received at
least ten days prior to the last day of the fiscal quarter, month or other
period to which the distribution relates.
Some
brokers may determine not to offer their clients the opportunity to participate
in our distribution reinvestment plan. Any prospective investor who wishes to
participate in our distribution reinvestment plan should consult with his or her
broker as to the broker’s position regarding participation in the distribution
reinvestment plan.
We
reserve the right to prohibit qualified retirement plans and other “benefit plan
investors” (as defined in ERISA) from participating in our distribution
reinvestment plan if such participation would cause our underlying assets to
constitute “plan assets” of qualified retirement plans. See “Investment by
Tax-Exempt Entities and ERISA Considerations.”
Each
stockholder electing to participate in our distribution reinvestment plan agrees
that, if at any time he or she fails to meet the applicable investor suitability
standards or cannot make the other investor representations or warranties set
forth in the then current prospectus or subscription agreement relating to such
investment, he or she will promptly notify the reinvestment agent in writing of
that fact.
Subscribers
should note that affirmative action in the form of written notice to the
reinvestment agent must be taken to withdraw from participation in our
distribution reinvestment plan. A withdrawal from participation in our
distribution reinvestment plan will be effective with respect to distributions
for a quarterly or monthly distribution period, as applicable, only if written
notice of termination is received at least ten days prior to the end of such
distribution period. In addition, a transfer of shares prior to the date our
shares are listed for trading on the New York Stock Exchange or NASDAQ Stock
Market which we have no intent to do at this time and which may never occur will
terminate participation in the distribution reinvestment plan with respect to
such transferred shares as of the first day of the distribution period in which
the transfer is effective, unless the transferee demonstrates to the
reinvestment agent that the transferee meets the requirements for participation
in the plan and affirmatively elects to participate in the plan by providing to
the reinvestment agent an executed enrollment form or other written
authorization required by the reinvestment agent.
Offers
and sales of shares pursuant to the distribution reinvestment plan must be
registered in every state in which such offers and sales are made. Generally,
such registrations are for a period of one year. Thus, we may have to stop
selling shares pursuant to the distribution reinvestment plan in any states in
which our registration is not renewed or extended.
Excluded
Distributions
Our board
of directors may designate that certain cash or other distributions attributable
to net sales proceeds will be excluded from distributions that may be reinvested
in shares under our distribution reinvestment plan (Excluded Distributions).
Accordingly, in the event that proceeds attributable to the potential sale
transaction described above are distributed to stockholders as an Excluded
Distribution, such amounts may not be reinvested in our shares pursuant to our
distribution reinvestment plan. The determination of whether all or part of a
distribution will be deemed to be an Excluded Distribution is separate and
unrelated to our requirement to distribute 90% of our taxable REIT income. In
its initial determination of whether to make a distribution and the amount of
the distribution, our board of directors will consider, among other factors, our
cash position and our distribution requirements as a REIT. Once our board of
directors determines to make the distribution, it will then consider whether all
or part of the distribution will be deemed to be an Excluded Distribution. In
most instances, we expect that our board of directors would not deem any of the
distribution to be an Excluded Distribution. In that event, the amount
distributed to participants in our distribution reinvestment plan will be
reinvested in additional shares of our common stock. If all or a portion of the
distribution is deemed to be an Excluded Distribution, the distribution will be
made to all stockholders, however, the excluded portion will not be reinvested.
As a result, we would not be able to use any of the Excluded Distribution to
assist in meeting future distributions and the stockholders would not be able to
use the distribution to purchase additional shares of our common stock through
our distribution reinvestment plan. We currently do not have any planned
Excluded Distributions, which will only be made, if at all, in addition to, not
in lieu of, regular distributions.
Federal
Income Tax Considerations
Taxable
participants will incur tax liability for partnership income allocated to them
even though they have elected not to receive their distributions in cash but
rather to have their distributions reinvested under our distributions
reinvestment plan. See “Risk Factors — Federal Income Tax Risks.” In addition,
to the extent you purchase shares through our distribution reinvestment plan at
a discount to their fair market value, you will be treated for tax purposes as
receiving an additional distribution equal to the amount of the discount. At
least until our offering stage is complete, we expect that (a) we will sell
shares under the distribution reinvestment plan at $9.50 per share, (b) no
secondary trading market for our shares will develop and (c) our advisor will
estimate the fair market value of a share to be $10.00. Therefore, at least
until our offering stage is complete, participants in our distribution
reinvestment plan will be treated as having received a distribution of $10.00
for each $9.50 reinvested by them under our distribution reinvestment plan. You
will be taxed on the amount of such distribution as a dividend to the extent
such distribution is from current or accumulated earnings and profits, unless we
have designated all or a portion of the dividend as a capital gain dividend. Tax
information regarding each participant’s participation in the plan will be
provided to each participant at least annually.
Amendment
and Termination
We
reserve the right to amend any aspect of our distribution reinvestment plan with
ten days’ notice to participants. The reinvestment agent also reserves the right
to terminate a participant’s individual participation in the plan, and we
reserve the right to terminate our distribution reinvestment plan itself in our
sole discretion at any time, by sending ten days’ prior written notice of
termination to the terminated participant or, upon termination of the plan, to
all participants. Our authority to amend the distribution reinvestment plan will
not revoke your ability to withdraw from the plan.
OUR
OPERATING PARTNERSHIP AGREEMENT
General
American
Realty Capital Operating Partnership, L.P. was formed on August 17, 2007 to
acquire, own and operate properties on our behalf. It is an Umbrella
Partnership Real Estate Investment Trust, or UPREIT, which structure is utilized
generally to provide for the acquisition of real property from owners who desire
to defer taxable gain that would otherwise be recognized by them upon the
disposition of their property. These owners may also desire to
achieve diversity in their investment and other benefits afforded to owners of
stock in a REIT. For purposes of satisfying the asset and income
tests for qualification as a REIT for tax purposes, the REIT’s proportionate
share of the assets and income of an UPREIT, such as American Realty Capital
Operating Partnership, L.P., are deemed to be assets and income of the
REIT.
A
property owner may contribute property to an UPREIT in exchange for limited
partnership units on a tax-free basis. In addition, American Realty
Capital Operating Partnership, L.P. is structured to make distributions with
respect to limited partnership units that will be equivalent to the
distributions made to holders of our common stock. Finally, a limited
partner in American Realty Capital Operating Partnership, L.P. may later
exchange his or her limited partnership units in American Realty Capital
Operating Partnership, L.P. for shares of our common stock in a taxable
transaction.
The
partnership agreement for American Realty Capital Operating Partnership, L.P.
contains provisions that would allow, under certain circumstances, other
entities, including other American Realty Capital-sponsored programs, to merge
into or cause the exchange or conversion of their interests for interests of
American Realty Capital Operating Partnership, L.P. In the event of such a
merger, exchange or conversion, American Realty Capital Operating Partnership,
L.P. would issue additional limited partnership interests, which would be
entitled to the same exchange rights as other limited partnership interests of
American Realty Capital Operating Partnership, L.P. As a result, any such
merger, exchange or conversion ultimately could result in the issuance of a
substantial number of shares of our common stock, thereby diluting the
percentage ownership interest of other stockholders.
We intend
to hold substantially all of our assets through American Realty Capital
Operating Partnership, L.P. We are the sole general partner of
American Realty Capital Operating Partnership, L.P., and our advisor, American
Realty Capital Advisors, LLC, is the only limited partner of American Realty
Capital Operating Partnership, L.P. American Realty Capital II, LLC
is the special limited partner of American Realty Capital Operating Partnership,
L.P. As the sole general partner of American Realty Capital Operating
Partnership, L.P., we have the exclusive power to manage and conduct the
business of American Realty Capital Operating Partnership, L.P.
The
following is a summary of certain provisions of the partnership agreement of
American Realty Capital Operating Partnership, L.P. This summary is
not complete and is qualified by the specific language in the partnership
agreement. You should refer to the partnership agreement, itself,
which we have filed as an exhibit to the registration statement, for more
detail.
Capital
Contributions
As we
accept subscriptions for shares, we will transfer substantially all of the net
proceeds of the offering to American Realty Capital Operating Partnership, L.P.
as a capital contribution. However, we will be deemed to have made
capital contributions in the amount of the gross offering proceeds received from
investors. American Realty Capital Operating Partnership, L.P. will
be deemed to have simultaneously paid the selling commissions and other costs
associated with the offering. If American Realty Capital Operating
Partnership, L.P. requires additional funds at any time in excess of capital
contributions made by our advisor and us (which are minimal in amount), or from
borrowings, we may borrow funds from a financial institution or other lender and
lend such funds to American Realty Capital Operating Partnership, L.P. on the
same terms and conditions as are applicable to our borrowing of such
funds. In addition, we are authorized to cause American Realty
Capital Operating Partnership, L.P. to issue partnership interests for less than
fair market value if we conclude in good faith that such issuance is in the best
interests of American Realty Capital Operating Partnership, L.P. and
us.
Operations
The
partnership agreement requires that American Realty Capital Operating
Partnership, L.P. be operated in a manner that will enable us to (a) satisfy the
requirements for being classified as a REIT for tax purposes, (b) avoid any U.S.
federal income or excise tax liability, and (c) ensure that American Realty
Capital Operating Partnership, L.P. will not be classified as a “publicly traded
partnership” for purposes of Section 7704 of the Internal Revenue Code, which
classification could result in American Realty Capital Operating Partnership,
L.P. being taxed as a corporation, rather than as a partnership. See
“Material U.S. Federal Income Tax Considerations — Tax Aspects of Our Operating
Partnership — Classification as a Partnership.”
The
partnership agreement provides that American Realty Capital Operating
Partnership, L.P. will distribute cash flow from operations as
follows:
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·
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regular
distributions will be made initially to us, which we will distribute to
the holders of our common stock until these holders have received
distributions equal to a cumulative non-compounded return of 6% per year
on their net investment. “Net investment” refers to $10.00 per
share, less a pro rata share of any proceeds received from the sale or
refinancing of properties.
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We cannot
assure investors of the cumulative non-compounded returns discussed above, which
we disclose solely as a measure for the incentive compensation of our sponsor,
advisor and affiliates.
Similarly,
the partnership agreement of American Realty Capital Operating Partnership, L.P.
provides that taxable income is allocated to the limited partners of American
Realty Capital Operating Partnership, L.P. in accordance with their relative
percentage interests such that a holder of one unit of limited partnership
interest in American Realty Capital Operating Partnership, L.P. will be
allocated taxable income for each taxable year in an amount equal to the amount
of taxable income to be recognized by a holder of one of our shares, subject to
compliance with the provisions of Sections 704(b) and 704(c) of the Internal
Revenue Code and corresponding Treasury Regulations. Losses, if any,
generally will be allocated among the partners in accordance with their
respective percentage interests in American Realty Capital Operating
Partnership, L.P.
Upon the
liquidation of American Realty Capital Operating Partnership, L.P., after
payment of debts and obligations, any remaining assets of American Realty
Capital Operating Partnership, L.P. will be distributed to partners according to
the following (The return calculations described below apply to all regular and
liquidation distributions received and not just distributions made upon
liquidation. Achievement of a particular threshold, therefore, is
determined with reference to all prior distributions made by our operating
partnership to its Special Limited Partner and to us, which we will then
distribute to our stockholders.):
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·
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first,
distributions in connection with our liquidation will be made initially to
us, which we will distribute to the holders of our common stock, until
these holders have received liquidation distributions equal to their
initial investment plus a cumulative non-compounded return of 6% per year
on their net investment. “Net investment” refers to $10.00 per
share, less a pro rata share of any proceeds received from the sale or
refinancing of properties.
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·
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after
this 6% threshold is reached, 85% of the aggregate amount of any
additional distributions by our operating partnership will be payable to
us (and the limited partners entitled to such distributions under the
terms of the operating partnership’s operating agreement), which we will
distribute to the holders of our common stock, and 15% of such amount will
be payable by our operating partnership to its Special Limited
Partner.
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In
addition to the administrative and operating costs and expenses incurred by
American Realty Capital Operating Partnership, L.P. in acquiring and operating
real properties, American Realty Capital Operating Partnership, L.P. will pay
all of our administrative costs and expenses, and such expenses will be treated
as expenses of American Realty Capital Operating Partnership,
L.P. Such expenses will include:
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all
expenses relating to the formation and continuity of our
existence;
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all
expenses relating to the public offering and registration of securities by
us;
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all
expenses associated with the preparation and filing of any periodic
reports by us under federal, state or local laws or
regulations;
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all
expenses associated with compliance by us with applicable laws, rules and
regulations;
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all
costs and expenses relating to any issuance or repurchase of partnership
interests or shares of our common stock;
and
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·
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all
our other operating or administrative costs incurred in the ordinary
course of our business on behalf of American Realty Capital Operating
Partnership, L.P.
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All
claims between the partners of American Realty Capital Operating Partnership,
L.P. arising out of the partnership agreement are subject to binding
arbitration.
Exchange
Rights
The
limited partners of American Realty Capital Operating Partnership, L.P.,
including American Realty Capital Advisors, LLC, have the right to cause their
limited partnership units to be redeemed by American Realty Capital Operating
Partnership, L.P. or purchased by us for cash. In either event, the
cash amount to be paid will be equal to the cash value of the number of our
shares that would be issuable if the limited partnership units were exchanged
for our shares on a one-for-one basis. Alternatively, we may elect to
purchase the limited partnership units by issuing one share of our common stock
for each limited partnership unit exchanged. These exchange rights
may not be exercised, however, if and to the extent that the delivery of shares
upon exercise would (a) result in any person owning shares in excess of our
ownership limits, (b) result in shares being owned by fewer than 100 persons,
(c) cause us to be “closely held” within the meaning of Section 856(h) of the
Internal Revenue Code, (d) cause us to own 10% or more of the ownership
interests in a tenant within the meaning of Section 856(d)(2)(B) of the Internal
Revenue Code, or (e) cause the acquisition of shares by a redeemed limited
partner to be “integrated” with any other distribution of our shares for
purposes of complying with the Securities Act.
Subject
to the foregoing, limited partners of American Realty Capital Operating
Partnership, L.P. may exercise their exchange rights at any time after one year
following the date of issuance of their limited partnership
units. However, a limited partner may not deliver more than two
exchange notices each calendar year and may not exercise an exchange right for
less than 1,000 limited partnership units, unless such limited partner holds
less than 1,000 units, in which case, it must exercise his exchange right for
all of his units. We do not expect to issue any of the shares of
common stock offered hereby to limited partners of American Realty Capital
Operating Partnership, L.P. in exchange for their limited partnership
units. Rather, in the event a limited partner of American Realty
Capital Operating Partnership, L.P. exercises its exchange rights, and we elect
to purchase the limited partnership units with shares of our common stock, we
expect to issue unregistered shares of common stock, or subsequently registered
shares of common stock, in connection with such transaction.
Amendments
to the Partnership Agreement
Our
consent, as the general partner of American Realty Capital Operating
Partnership, L.P., is required for any amendment to the partnership
agreement. We, as the general partner of American Realty Capital
Operating Partnership, L.P., and without the consent of any limited partner, may
amend the partnership agreement in any manner, provided, however, that the
consent of limited partners holding more than 50% of the interests of the
limited partners is required for any amendment that:
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alters
or changes the distribution and liquidation rights of limited partners,
except as otherwise permitted in the partnership
agreement;
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alters
or changes their exchange rights;
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imposes
on the limited partners any obligation to make additional capital
contributions to American Realty Capital Operating Partnership, L.P.;
and
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·
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alters
the terms of the partnership agreement regarding the rights if the limited
partners with respect to extraordinary
transactions.
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Termination
of the Partnership
The
operating partnership will continue in full force and effect until December 31,
2099, or until sooner dissolved and terminated upon (a) election by us and with
the consent of the limited partners holding a majority interest, (b) our
dissolution, bankruptcy, insolvency or termination, (c) the sale or other
disposition of all or substantially all of the assets of the operating
partnership, or (d) by operation of law.
Transferability
of Interests
We may
not (a) voluntarily withdraw as the general partner of American Realty Capital
Operating Partnership, L.P. (except with the consent of two-thirds of the
limited partner interests), (b) engage in any merger, consolidation or other
business combination, or (c) transfer our general partnership interest in
American Realty Capital Operating Partnership, L.P. (except to (i) a
wholly-owned subsidiary or (ii) with the consent of two-thirds of the limited
partner interests), unless the transaction in which such withdrawal, business
combination or transfer occurs results in the limited partners receiving or
having the right to receive an amount of cash, securities or other property
equal in value to the amount they would have received if they had exercised
their exchange rights immediately prior to such transaction or unless, in the
case of a merger or other business combination, the successor entity contributes
substantially all of its assets to American Realty Capital Operating
Partnership, L.P. in return for an interest in American Realty Capital Operating
Partnership, L.P. and agrees to assume all obligations of the general partner of
American Realty Capital Operating Partnership, L.P. With certain
exceptions, a limited partner may not transfer its interests in American Realty
Capital Operating Partnership, L.P., in whole or in part, without our written
consent as general partner.
PLAN
OF DISTRIBUTION
The
Offering
We
commenced our initial public offering of shares of our common stock on January
25, 2008, which we refer to as our initial offering. As of July 27,
2010, we had raised gross offering proceeds of $328.7 million from 8,604
stockholders pursuant to our initial offering, which will terminate no later
than January 25, 2011, unless extended to July 25, 2011. As of July
27, 2010, we owned 169 geographically diverse properties comprising
approximately 2.9 million square feet of gross leasable area, located in 30
states.
In this
follow-on offering, we are offering a maximum of 35,000,000 shares of our common
stock to the public through Realty Capital Securities, LLC, our dealer manager,
a registered broker-dealer affiliated with our advisor at a price of $10.00 per
share. The total amount raised between the initial offering and the
follow-on offering will not exceed $1.5 billion, excluding any funds raised by
the distribution reinvestment plan.
Our board
of directors has arbitrarily determined the selling price of the shares,
consistent with comparable real estate investment programs in the market, and
such price bears no relationship to our book or asset values, or to any other
established criteria for valuing issued or outstanding
shares. Because the offering price is not based upon any independent
valuation, the offering price is not indicative of the proceeds that you would
receive upon liquidation.
The
shares are being offered on a “best efforts” basis, which means generally that
the dealer manager is required to use only its best efforts to sell the shares
and it has no firm commitment or obligation to purchase any of the
shares. The offering of shares of our common stock will terminate on
or before August 5, 2012, which is two years after the effective date of this
offering. This offering must be registered in every state in which we
offer or sell shares. Generally, such registrations are for a period
of one year. Thus, we may have to stop selling shares in any state in
which our registration is not renewed or otherwise extended
annually. We reserve the right to terminate this offering at any time
prior to the stated termination date.
Realty
Capital Securities, LLC
Realty
Capital Securities, LLC, our dealer manager, was organized in August 2007 for
the purpose of participating in and facilitating the distribution of securities
in programs sponsored by American Realty Capital II, LLC, its affiliates and its
predecessors. For additional information about Realty Capital
Securities, LLC, including information relating to Realty Capital Securities,
LLC’s affiliation with us, please refer to the section of this prospectus
captioned “Management — Affiliated Companies—Dealer Manager.”
Compensation
We Will Pay for the Sale of Our Shares
Except as
provided below, our dealer manager will receive selling commissions of 7% of the
gross offering proceeds. The dealer manager also will receive a dealer manager
fee in the amount of 3% of the gross offering proceeds as compensation for
acting as the dealer manager. We will not pay referral or similar fees to any
accountants, attorneys or other persons in connection with the distribution of
the shares. Realty Capital Securities, LLC will reallow all selling commissions
to participating broker-dealers.
The
dealer manager does not intend to be a market maker and so will not execute
trades for selling stockholders. Set forth below is a table
indicating the estimated dealer manager compensation and expenses that will be
paid in connection with the offering.
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Per
Share
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Total
Maximum
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Primary
Offering
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Price
to Public
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$
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10.00
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$
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325,000,000
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Selling
Commissions
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0.70
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$
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22,750,000
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Dealer
Manager Fees
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0.30
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$
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9,750,000
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Proceeds
to American Realty Capital Trust, Inc.
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$
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9.00
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$
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292,500,000
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Distribution
Reinvestment Plan
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Price
to Public
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$
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9.50
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$
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25,000,000
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Distribution
Selling Commissions
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—
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—
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Dealer
Manager Fees
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—
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—
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Proceeds
to American Realty Capital Trust, Inc.
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$
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9.50
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$
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25,000,000
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We will
not pay any selling commissions in connection with the sale of shares to
investors whose contracts for investment advisory and related brokerage services
include a fixed or “wrap” fee feature. Investors may agree with their
participating brokers to reduce the amount of selling commissions payable with
respect to the sale of their units shares down to zero (a) if the investor has
engaged the services of a registered investment advisor or other financial
advisor who will be paid compensation for investment advisory services or other
financial or investment advice or (b) if the investor is investing through a
bank trust account with respect to which the investor has delegated the
decision-making authority for investments made through the account to a bank
trust department. The net proceeds to us will not be affected by
reducing the commissions payable in connection with such
transaction. All such sales must be made through registered
broker-dealers. Neither our dealer manager nor its affiliates will
directly or indirectly compensate any person engaged as an investment advisor or
a bank trust department by a potential investor as an inducement for such
investment advisor or bank trust department to advise favorably for an
investment in our shares. In connection with the sale of shares to
investors who elect the “wrap fee” feature, the dealer manager may pay to the
registered investment advisor or other financial advisor or the company that
sponsors the wrap account, service or other denominated fees on an annual
basis. In all events, the amount of the dealer manager fee and any
services or other fee paid in connection with the sale of shares to investors
whose contracts for investment advisor or related brokerage services include a
fixed or wrap fee feature will not exceed 10% of the gross proceeds of the
shares acquires by such investors. Further, the dealer manager may
pay up to 0.25% of the amount it receives from the sale of the shares in
commissions to such an investment advisor.
We or our
affiliates also may provide permissible forms of non-cash compensation to
registered representatives of our dealer manager and the participating
broker-dealers, such as golf shirts, fruit baskets, cakes, chocolates, a bottle
of wine, a gift certificate (provided it cannot be redeemed for cash) or tickets
to a sporting event. In no event shall such items exceed an aggregate
value of $100 per annum per participating salesperson, or be pre-conditioned on
achievement of a sales target. The value of such items will be
considered underwriting compensation in connection with this
offering.
We have
agreed to indemnify the participating broker-dealers, including our dealer
manager and selected registered investment advisors, against certain liabilities
arising under the Securities Act. However, the Securities and
Exchange Commission takes the position that indemnification against liabilities
arising under the Securities Act is against public policy and is
unenforceable.
In
addition to the compensation described above, our sponsor may pay certain costs
associated with the sale and distribution of our shares. We will not
reimburse our sponsor for such payments. Nonetheless, such payments
will be deemed to be “underwriting compensation” by the FINRA. In
accordance with the rules of the FINRA, the table above sets forth the nature
and estimated amount of all items that will be viewed as “underwriting
compensation” by the FINRA that are anticipated to be paid by us and our sponsor
in connection with the offering. The amounts shown assume we sell all
of the shares offered hereby and that all shares are sold in our primary
offering through participating broker-dealers, which is the distribution channel
with the highest possible selling commissions and dealer manager
fees.
We will
not pay selling commissions in connection with the following special
sales:
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the
sale of common stock to our employees, directors and associates and our
affiliates, our advisor, affiliates of our advisor, the dealer manager or
their respective officers and
employees;
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the
purchase of common stock under the distribution reinvestment
program;
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the
sale of our common stock to one or more soliciting dealers and to their
respective officers and employees and some of their respective affiliates
who request and are entitled to purchase common stock net of selling
commissions; and
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·
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the
common stock credited to an investor as a result of a volume
discount.
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It is
illegal for us to pay or award any commissions or other compensation to any
person engaged by you for investment advice as an inducement to such advisor to
advise you to purchase our common stock; however, nothing herein will prohibit a
registered broker-dealer or other properly licensed person from earning a sales
commission in connection with a sale of the common stock.
If, in
connection with your purchase of our shares, you have engaged the services of a
registered investment advisor to whom you have agreed to pay a fee for
investment advisory services in lieu of normal commissions based on the volume
of securities sold, you may agree with the participating broker-dealer selling
such shares and Realty Capital Securities, LLC to reduce the amount of selling
commissions payable with respect to such sale to zero. The net
proceeds to us will not be affected by eliminating the commissions payable in
connection with sales to investors purchasing through such investment
advisors. All such sales must be made through registered
broker-dealers.
To the
extent necessary to comply with FINRA rules, we will provide, on an annual
basis, a per-share estimated value of our common stock, the method by which we
developed such value and the date of the data we used to estimate such
value.
Shares
Purchased by Affiliates
Our
executive officers and directors, as well as officers and employees of American
Realty Capital Advisors, LLC and their family members (including spouses,
parents, grandparents, children and siblings) or other affiliates and Friends,
may purchase shares offered in this offering at a discount. Friends
of American Realty Capital Advisors, LLC means service vendors who have a prior
business relationship with the sponsors, including but not limited to real
estate brokers, joint venture partners and their employees, title insurance
company executives, surveyors, attorneys and similar individuals; and
individuals who have a prior personal relationship with the sponsors from their
association with AFR or with American Realty Capital. The purchase
price for such shares shall be $9.00 per share, reflecting the fact that selling
commissions in the amount of $0.70 per share and a dealer manager fee in the
amount of $0.30 per share will not be payable in connection with such
sales. The net offering proceeds we receive will not be affected by
such sales of shares at a discount. Our executive officers, directors
and other affiliates will be expected to hold their shares purchased as
stockholders for investment and not with a view towards resale. In
addition, shares purchased by American Realty Capital Advisors, LLC or its
affiliates will not be entitled to vote on matters presented to the stockholders
for a vote relating to the removal of American Realty Capital, LLC as our
advisor, the removal of any director that is an affiliate of American Realty
Capital, LLC or any transaction between us and American Realty Capital, LLC or
any of its affiliates. Further, from and after the commencement of
this offering, our directors, officers, advisor and their respective affiliates
are subject to the restrictions on ownership and transfer of our stock,
including the restriction that prohibits any person from owning more than 9.8%
in value of the aggregate of our outstanding shares of stock and not
more than 9.8% (in value or in number of shares, whichever is more restrictive)
of any class or series of shares of our stock.
Volume
Discounts
We will
offer a reduced share purchase price to “single purchasers” on orders of more
than $500,000 and selling commissions paid to Realty Capital Securities, LLC and
participating broker-dealers will be reduced by the amount of the share purchase
price discount. The per share purchase price will apply to the
specific range of each share purchased in the total volume ranges set forth in
the table below. The reduced purchase price will not affect the
amount we receive for investment.
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Purchase Price per Share
in Volume Discount Range
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Selling Commission per
Share in Volume Discount Range
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$ |
1,000
– $ 500,000 |
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$ |
10.00 |
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$ |
0.70 |
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500,001
– 1,000,000 |
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9.90 |
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0.60 |
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1,000,001
– 5,000,000 |
+ |
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9.55 |
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0.25 |
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Any
reduction in the amount of the selling commissions in respect of volume
discounts received will be credited to the investor in the form of additional
shares. Fractional shares will be issued.
As an
example, a single purchaser would receive 100,505.05 shares rather than 100,000
shares for an investment of $1,000,000 and the selling commission would be
$65,303.03. The discount would be calculated as
follows: The purchaser would acquire 50,000 shares at a cost of
$10.00 and 50,505.05 at a cost of $9.90 per share and would pay commissions of
$0.70 per share for 50,000 shares and $0.60 per share for 50,505.05
shares.
Purchases
by participating broker-dealers, including their registered representatives and
their immediate family, will be less the selling commission
Selling
commissions for purchases of $5,000,000 or more will, in our sole discretion, be
reduced to $0.20 per share or less, but in no event will the proceeds to us be
less than $9.20 per share. In the event of a sale of $5,000,000 or
more, we will supplement this prospectus to include: (a) the
aggregate amount of the sale, (b) the price per share paid by the purchaser and
(c) a statement that other investors wishing to purchase at least the amount
described in (a) will pay no more per share than the initial
purchaser.
Orders
may be combined for the purpose of determining the total commissions payable
with respect to applications made by a “single purchaser,” so long as all the
combined purchases are made through the same soliciting dealer. The
amount of total commissions thus computed will be apportioned pro rata among the
individual orders on the basis of the respective amounts of the orders being
combined. As used herein, the term “single purchaser” will
include:
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any
person or entity, or persons or entities, acquiring shares as joint
purchasers;
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all
profit-sharing, pension and other retirement trusts maintained by a given
corporation, partnership or other
entity;
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·
|
all
funds and foundations maintained by a given corporation, partnership or
other entity;
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all
profit-sharing, pension and other retirement trusts and all funds or
foundations over which a designated bank or other trustee, person or
entity exercises discretionary authority with respect to an investment in
our company; and
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·
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any
person or entity, or persons or entities, acquiring shares that are
clients of and are advised by a single investment advisor registered under
the Investment Advisors Act of
1940.
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In the
event a single purchaser described in the last five categories above wishes to
have its orders so combined, that purchaser will be required to request the
treatment in writing, which request must set forth the basis for the discount
and identify the orders to be combined. Any request will be subject
to our verification that all of the orders were made by a single
purchaser.
Orders
also may be combined for the purpose of determining the commissions payable in
the case of orders by any purchaser described in any category above who, within
90 days of its initial purchase of shares, orders additional
shares. In this event, the commission payable with respect to the
subsequent purchase of shares will equal the commission per share which would
have been payable in accordance with the commission schedule set forth above if
all purchases had been made simultaneously. Purchases subsequent to
this 90 day period will not qualify to be combined for a volume discount as
described herein.
Unless
investors indicate that orders are to be combined and provide all other
requested information, we cannot be held responsible for failing to combine
orders properly.
Purchases
by entities not required to pay U.S. federal income tax may only be combined
with purchases by other entities not required to pay U.S. federal income tax for
purposes of computing amounts invested if investment decisions are made by the
same person. If the investment decisions are made by an independent
investment advisor, that investment advisor may not have any direct or indirect
beneficial interest in any of the entities not required to pay U.S. federal
income tax whose purchases are sought to be combined. You must mark
the “Additional Investment” space on the subscription agreement signature page
in order for purchases to be combined. We are not responsible for
failing to combine purchases if you fail to mark the “Additional Investment”
space.
If the
subscription agreements for the purchases to be combined are submitted at the
same time, then the additional common stock to be credited to you as a result of
such combined purchases will be credited on a pro rata basis. If the
subscription agreements for the purchases to be combined are not submitted at
the same time, then any additional common stock to be credited as a result of
the combined purchases will be credited to the last component purchase, unless
we are otherwise directed in writing at the time of the
submission. However, the additional common stock to be credited to
any entities not required to pay U.S. federal income tax whose purchases are
combined for purposes of the volume discount will be credited only on a pro rata
basis on the amount of the investment of each entity not required to pay U.S.
federal income tax on their combined purchases.
California
residents should be aware that volume discounts will not be available in
connection with the sale of shares made to California residents to the extent
such discounts do not comply with the provisions of Rule 260.140.51 adopted
pursuant to the California Corporate Securities Law of 1968. Pursuant
to this rule, volume discounts can be made available to California residents
only in accordance with the following conditions:
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there
can be no variance in the net proceeds to us from the sale of the shares
to different purchasers of the same
offering;
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all
purchasers of the shares must be informed of the availability of quantity
discounts;
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the
same volume discounts must be allowed to all purchasers of shares which
are part of the offering;
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the
minimum amount of shares as to which volume discounts are allowed cannot
be less than $10,000;
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the
variance in the price of the shares must result solely from a different
range of commissions, and all discounts must be based on a uniform scale
of commissions; and
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no
discounts are allowed to any group of
purchasers.
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Accordingly,
volume discounts for California residents will be available in accordance with
the foregoing table of uniform discount levels based on dollar volume of shares
purchased, but no discounts are allowed to any group of purchasers, and no
subscriptions may be aggregated as part of a combined order for purposes of
determining the number of shares purchased.
Subscription
Process
To
purchase shares in this offering, you must complete and sign a subscription
agreement, like the one contained in this prospectus as Appendix
A. Subscribers should pay for their shares by delivering a check for
the full purchase price of the shares, payable to “American Realty Capital
Trust, Inc.” You should exercise care to ensure that the applicable subscription
agreement is filled out correctly and completely. By executing the
subscription agreement, you will attest that you meet the suitability standards
described in this prospectus and agree to be bound by all of the terms of the
subscription agreement.
Subscriptions
will be effective only upon our acceptance, and we reserve the right to reject
any subscription in whole or in part. We may not accept a
subscription for shares until at least five business days after the date you
receive this prospectus. Subject to compliance with Rule 15c2-4 of
the Exchange Act, our dealer manager and/or the broker-dealers participating in
the offering will promptly submit a subscriber’s check no later than the
business day following receipt of the subscriber’s subscription documents and
check. The proceeds from your subscription will be deposited in a
segregated escrow account and will be held in trust for your benefit, pending
our acceptance of your subscription.
We will
accept or reject subscriptions within 35 days after we receive
them. If your subscription agreement is rejected, your funds, without
interest, or reductions for offering expenses, commissions or fees will be
returned to you within ten business days after the date of such
rejection. If your subscription is accepted, we will send you a
confirmation of your purchase after you have been admitted as an
investor. We may admit new investors at least monthly and we may
admit new investors more frequently. We intend to admit investors
weekly.
Status
of the Initial Offering
We
commenced our initial public offering of 150,000,000 shares of common stock on
January 25, 2008, which we refer to as the initial offering. As of
July 27, 2010, we had issued 33,045,410 shares of common stock. Total
gross proceeds from these issuances were $328.7 million. As of July
27, 2010, the aggregate value of all share issuances and subscriptions
outstanding was $330.2 million based on a per share value of $10.00 (or $9.50
per share for shares issued under the DRIP). We will offer these
shares until January 25, 2011, unless extended through July 25, 2011, provided
that the offering will be terminated if all of the shares are sold before
then. As of July 27, 2010, there were approximately 116,955,000
shares of our common stock outstanding, excluding shares available under the
initial offering’s distribution reinvestment plan.
In this
follow-on offering, we are offering up to 32,500,000 shares of our common
stock, $0.01 par value per share, in our primary offering for $10.00 per share,
with discounts available for certain categories of purchasers.
HOW
TO SUBSCRIBE
Investors
who meet the applicable suitability standards and minimum purchase requirements
described in the “Suitability Standards” section of this prospectus may purchase
shares of common stock. If you want to purchase shares, you must
proceed as follows:
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(3)
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Read
the entire prospectus and the current supplement(s), if any, accompanying
this prospectus.
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(4)
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Complete
the execution copy of the applicable subscription agreement. A
specimen copy of the subscription agreement, including instructions for
completing it, for new and current investors is included in this
prospectus as Appendix A.
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(5)
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Deliver
a check to American Realty Capital Trust, Inc., c/o DST Systems, Inc., 430
W. 7th
St. Kansas City, MO 64105-1407, for the full purchase price of the shares
being subscribed for, payable to “American Realty Capital Trust, Inc.”
along with the completed subscription agreement. For custodial
accounts (such as are commonly used for individual retirement accounts)
send the completed subscription agreement and check to your custodian who
will forward to DST Systems, Inc. Certain dealers who have “net
capital,” as defined in the applicable federal securities regulations, of
$250,000 or more may instruct their customers to make their checks payable
directly to the dealer. In such case, the dealer will issue a
check made payable to us for the purchase price of your
subscription. The name of the dealer appears on the
subscription agreement.
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(6)
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By
executing the subscription agreement and paying the full purchase price
for the shares subscribed for, you will attest that you meet the
suitability standards as provided in the “Suitability Standards” section
of this prospectus and as stated in the subscription agreement and agree
to be bound by the terms of the subscription
agreement.
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SUPPLEMENTAL
SALES MATERIAL
In
addition to this prospectus, we may utilize certain sales material in connection
with the offering of the shares, although only when accompanied by or preceded
by the delivery of this prospectus. The sales materials may include
information relating to this offering, the past performance of American Realty
Capital Advisors, LLC, our advisor, and its affiliates, property brochures and
articles and publications concerning real estate. In certain
jurisdictions, some or all of our sales material may not be permitted and will
not be used in those jurisdictions.
The
offering of shares is made only by means of this prospectus. Although
the information contained in our supplemental sales material will not conflict
with any of the information contained in this prospectus, the supplemental
materials do not purport to be complete, and should not be considered a part of
this prospectus or the registration statement of which this prospectus is a
part.
LEGAL
MATTERS
Venable
LLP, Baltimore, Maryland, will pass upon the legality of the common stock and
Proskauer Rose LLP, New York, New York, will pass upon legal matters in
connection with our status as a REIT and the Operating Partnership’s status as a
partnership for U.S. federal income tax purposes. Proskauer Rose LLP
will rely on the opinion of Venable LLP as to all matters of Maryland
law. Neither Venable LLP nor Proskauer Rose LLP purport to represent
our stockholders or potential investors, who should consult their own
counsel. Proskauer Rose LLP also provides legal services to American
Realty Capital Advisors, LLC, our advisor, as well as affiliates of American
Realty Capital Advisors, LLC, and may continue to do so in the
future.
EXPERTS
The
audited consolidated financial statements and financial statement schedule
incorporated by reference in this prospectus and elsewhere in the registration
statement have been so incorporated by reference in reliance upon the report of
Grant Thornton LLP, independent registered public accountants, upon the
authority of said firm as experts in accounting and auditing in giving said
report.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
We have
elected to “incorporate by reference” certain information into this
prospectus. By incorporating by reference, we are disclosing
important information to you by referring you to documents we have filed
separately with the SEC. The information incorporated by reference is
deemed to be part of this prospectus. You may read and copy any
document we have electronically filed with the SEC at the SEC’s public reference
room in Washington, D.C. at 100 F Street, NE., Room 1580, Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information
about the operation of the public reference room. In addition, any
document we have electronically filed with the SEC is available at no cost to
the public over the Internet at the SEC’s website at www.sec.gov. You
can also access documents that are incorporated by reference into this
prospectus at the website maintained by our sponsor, http://www.americanrealtycap.com.
The
following documents filed with the SEC are incorporated by reference in this
prospectus, except for any document or portion thereof deemed to be “furnished”
and not filed in accordance with SEC rules:
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Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 filed with
the SEC on March 18, 2010;
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Quarterly
Report on Form 10-Q for the period ended March 31, 2010, filed with the
SEC on May 7, 2010;
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Current
Report on Form 8-K, dated April 30, 2010, filed with the SEC on May 6,
2010;
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Current
Report on Form 8-K dated June 2, 2010, filed with the SEC on June 3,
2010;
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Current
Report on Form 8-K dated June 3, 2010, filed with the SEC on June 4, 2010;
and
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Current
Report on Form 8-K dated July 27, 2010, filed with the SEC on August 2,
2010.
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We will
provide to each person to whom this prospectus is delivered a copy of any or all
of the information that we have incorporated by reference into this prospectus
but not delivered with this prospectus. To receive a free copy of any
of the reports or documents incorporated by reference in this prospectus, other
than exhibits, unless they are specifically incorporated by reference in those
documents, write or call us at Three Copley Place, Suite 3300, Boston, MA 02116,
1-866-771-2088, Attn: Investor Services. The information
relating to us contained in this prospectus does not purport to be comprehensive
and should be read together with the information contained in the documents
incorporated or deemed to be incorporated by reference in this
prospectus.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed a registration statement on Form S-11 with the Securities and Exchange
Commission in connection with our initial public offering. We are
required to file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission.
You may
request and obtain a copy of these filings, at no cost to you, by writing or
telephoning us at the following addresses:
American
Realty Capital Trust, Inc.
Three
Copley Place
Suite
3300
Boston,
MA 02116
1-866-771-2088
Attn: Investor
Services
One of
our affiliates maintains an Internet site at www.americanrealtycap.com, at
which there is additional information about us. The contents of that
site are not incorporated by reference in, or otherwise a part of, this
prospectus.
We will
deliver electronically all available documents relating to an investment in our
company to all stockholders who consent to electronic delivery of such documents
by checking the applicable box in the subscription
agreement. However, a stockholder may revoke consent to electronic
delivery at any time by contacting American Realty Capital Trust, Inc., Three
Copley Place, Boston, MA 02116 (Phone: 866-771-2088,
Fax: 857-350-9597). If the stockholder revokes such
consent, the stockholder will subsequently receive all such documents in paper
format. In addition, a stockholder may request paper copies of any
documents delivered electronically by contacting American Realty Capital Trust,
Inc. A stockholder’s consent to electronic delivery is effective
until revoked and relates to all documents relating to the stockholders’
investment.
This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits related thereto as filed with the Securities and
Exchange Commission, reference to which is hereby made.
You can
read our registration statement and the exhibits thereto and our future
Securities and Exchange Commission filings over the Internet at www.sec.gov. You
may also read and copy any document we file with the Securities and Exchange
Commission at its Public Reference Room at 100 F Street, N.W., Washington, D.C.
20549. You may also obtain copies of the documents at prescribed
rates by writing to the Public Reference Section of the Securities and Exchange
Commission at 100 F Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 or e-mail at [email protected] for further information
on the operation of the public reference facilities.
APPENDIX
A: SUBSCRIPTION AGREEMENT
American
Realty Capital Trust, Inc.
Subscription
Agreement
1.
INVESTMENT
Amount of
Subscription $________________________This is an ¨
Initial Investment ¨
Additional Investment
State in
which sale was made if other than state of residence ________ ¨ Check
enclosed ¨
Subscription amount wired
The
minimum initial investment amount is 100 Shares ($1,000), with additional
investment increments of 10 shares ($100). Certain states may
vary. Please see prospectus.
¨ Net
Commission Purchases. Please check this box if you are eligible for
Net Commission Purchase. Net commission purchases are available to
registered representatives, employees of soliciting broker-dealer, American
Realty Capital Trust and its affiliates, participants in a wrap account or
commission replacement account approved for a discount by the Broker-Dealer,
RIA, bank trust account, etc. Representative will not receive selling
commission.
¨
Automatic Purchase Plan. Please check this box if you wish to
authorize additional investments in the Fund via automatic debits from your bank
account. A separate registration form is required to
participate.
Investors
should make check payable to: American Realty Capital Trust,
Inc.
2.
TYPE OF OWNERSHIP (CHECK ONE)
¨
Individual
¨
Joint Tenants With
Right of Survivorship
¨ Tenants
in Common
¨
Transfer on Death**
(Provide
Beneficiary(ies)
in
Section 3)
¨
Trust Type:
(please
specify, i.e., Family,
Living,
Revocable, etc.)
¨ Corporation
¨ Company
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¨
Community Property
¨Partnership
¨A
Married Person Separate Property
¨IRA*
Traditional
¨IRA*Roth
¨IRA*Rollover
¨IRA*SEP
¨IRA*Type: ______________
¨Keogh*
¨Qualified
Pension Plan*
¨Qualified
Profit Sharing Plan*
¨Charitable
Remainder Trust
¨Non
Profit Organization
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¨Custodian: As
Custodian for
Under
the Uniform Gift to Minors Act,
State
of _____________________
Under
the Uniform Transfers to Minors Act,
State
of _________________
¨Limited
Liability Company (LLC)
¨Other
_____________________
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*
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Investors
who are plan participants under a registered IRA, Keogh, Qualified Pension
Plan or Qualified Profit Sharing Plan program may be eligible to purchase
such investment through such accounts. No representations are
made, and the offeror disclaims any responsibility or liability to the
plan custodian, plan administrators, plan participants, investors, or
beneficiaries thereof as to the tax ramifications of such investment, the
suitability or eligibility of such investment under the respective plan,
or that such Investment comports with ERISA, Internal Revenue Service or
other governmental rules and regulations pertaining to such plan
investments and rights thereunder. A separate private
investment form or similar documentation from the Plan
Custodian/Administrator and plan participants/investors is required for
investment through these types of
accounts.
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**
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Investors
who qualify may elect Transfer on Death (TOD) registration for such
investment account. TOD registration is designed to give an
owner/investor of securities the option of a nonprobate transfer at death
of the assets held in the account by designating proposed beneficiary(ies)
to receive the account assets upon the owner/investor’s
death. TOD registration is available only for
owner(s)/investor(s) who (1) is a natural person or (2) two natural
persons holding the account as Tenants by the Entirety or (3) two or more
natural persons holding the account as Joint Tenants with Right of
Survivorship or (4) a married couple holding the account as community
property with right of survivorship. The following forms of
ownership are ineligible for TOD registration: Tenants in
Common, community property without survivorship, non-natural account
owners (i.e., entities such as corporations, trusts or partnerships), and
investors who are not residents of a state that has adopted the Uniform
Transfer on Death Security Registration
Act.
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3.
INVESTOR INFORMATION
Please
print name(s) in which Shares are to be registered. Include custodian
or trust name if applicable.
¨
Mr. ¨
Mrs. ¨
Ms. ¨
Mr. & Mrs. ¨
Other
Name of
Investor: _________________________________________________________________________
Tax
ID/Social Security Number _____________________________
Date of Birth/Incorporation _________________
Name of
Joint Owner: ____________________________________________________________________
Tax
ID/Social Security Number _____________________________
Date of Birth/Incorporation _________________
Legal
Address (cannot be a P.O. Box) ____________________________________________________________
City: ________________________________________
State: ________________ Zip
Code: __________
Mailing
Address _________________________________________________________________________
City: ________________________________________
State: ________________ Zip
Code: __________
Home
Telephone: ________________________Business
Telephone: ___________________________________
E-Mail: __________________________________________________________________________________________
Mother’s
Maiden Name (requested for security purposes) __________________________________________
Transfer
on Death Beneficiary Information (For Individual or Joint Accounts
only)
Name: ____________________________________________________________________________
Tax
ID/Social Security Number _________________________________
Primary % ____________________
Name: ____________________________________________________________________________
Tax
ID/Social Security Number _________________________________
Primary % ____________________
¨ U.S.
Citizen ¨ Resident
Alien ¨ Non-Resident
Alien
¨
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Electronic
Delivery: Check here if you consent, in the event that American
Realty Capital Trust, Inc. elects to deliver any shareholder
communications electronically in lieu of mailing paper documents, to
receiving such communications via e-mail notice that such communications
are available on American Realty Capital Trust, Inc.
website.
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Custodian
Information (if registered under IRA, Keogh, or Qualified Retirement
Plan)
Name of
Institution
____________________________________________________________________________
Street
Address ________________________________________________________________________________
City: ________________________________________
State: ________________ Zip
Code: __________
Account
Number: ________________________ Tax
ID: _______________Phone: _________________________
4.
DISTRIBUTION OPTIONS
You may
choose to have your distribution applied in two different
ways. Please indicate your preference(s) below. If this is
an additional purchase, and you have selected a new distribution allocation,
this new allocation will be retroactive to all previous shares and will affect
all future distributions.
Allocation%
__% ¨ I
would like to receive a distribution check mailed to my mailing address listed
in Section 3.
__% ¨ I
would like for my distribution to be deposited into a third-party
account.*
100% Distribution
preference(s) must be made in whole percentages equaling 100%
Institution
Name: _______________________________________
Account Name: ____________
Institution
ABA#: _______________________________________
Account Number: ___________
Street/P.O.
Box: ________________________________________________________________
City: ________________________________________
State: ________________ Zip
Code: __________
*
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I
authorize American Realty Capital Trust, Inc. REIT or its agent to deposit
my distribution into the provided third party account listed
above. This authority will remain in force until I notify
American Realty Capital Trust, Inc. REIT in writing to cancel
it. In the event that American Realty Capital Trust,
Inc. REIT deposits funds erroneously into my account, they are
authorized to debit my account for an amount not to exceed the amount of
the erroneous deposit.
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5.
SUBSCRIBER SIGNATURES
Please
carefully read and separately initial each of the representations
below. Except in the case of fiduciary accounts, you may not grant
any person a power of attorney to make such representations on your
behalf.
The
undersigned further acknowledges and/or represents (or in the case of fiduciary
accounts, the person authorized to sign on such investor’s behalf) the following
(ALL appropriate lines must be
initialed):
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acknowledges
receipt, not less than five (5) business days prior to the signing of this
Subscription Agreement, of the Prospectus of the Company relating to the
Shares wherein the terms and conditions of the offering of the Shares are
described, including among other things, the restriction on ownership and
transfer of Shares, which require, under certain circumstances, that a
holder of Shares shall give written notice and provide certain information
to the Company (Minnesota and Massachusetts residents do not
initial);
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¨
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represents
that I (we) either: (i) have a net worth (excluding home, home furnishings
and automobiles) of at least $70,000 and estimate that (without regard to
investment in the Company) I (we) have gross income due in the current
year of at least $70,000; or (ii) have a net worth (excluding home, home
furnishings and automobiles) of at least $250,000 or such higher
suitability as may be required by certain states and set forth in the
“Investor Suitability Standards” section of the Prospectus; in the case of
sales to fiduciary accounts, suitability standards must be met by the
beneficiary, the fiduciary account or by the donor or grantor who directly
or indirectly supplies the funds for the purchase of the
Shares;
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represents
that the investor is purchasing the Shares for his or her own account and
if I am (we are) purchasing Shares on behalf of a trust or other entity of
which I am (we are) trustee(s) or authorized agent(s) I (we) have due
authority to execute the Subscription Agreement Signature Page and do
hereby legally bind the trust or other entity of which I am (we are)
trustee(s) or authorized agent(s);
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¨
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acknowledges
that the Shares are not liquid (Massachusetts residents do not initial);
and
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if
an affiliate of the Company, represents that the Shares are being
purchased for investment purposes only and not with a view toward
immediate resale.
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¨
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For
residents of Kentucky only — Investors must have either (a) a net worth of
$250,000 or (b) a gross annual income of at least $70,000 and a net worth
of at least $70,000, with the amount invested in this offering not to
exceed 10% of the Kentucky investor’s liquid net worth.
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¨
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For
residents of Massachusetts, Ohio, Iowa, Pennsylvania and Oregon -
Investors must have either (a) a minimum net worth of at least $250,000 or
(b) an annual gross income of at least $70,000 and a net worth of at least
$70,000. The investor’s maximum investment in the issuer and its
affiliates cannot exceed 10% of the Massachusetts, Ohio, Pennsylvania or
Oregon resident’s net worth.
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¨
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For
residents of Michigan — Investors, must have either (a) a minimum net
worth of at least $250,000 or (b) an annual gross income of at least
$70,000 and a net worth of at least $70,000. The investor’s maximum
investment in the issuer cannot exceed 10% of the Michigan resident’s net
worth.
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¨
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¨
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Tennessee
— In addition to the suitability requirements described above, investors’
maximum investment in our shares and our affiliates shall not exceed 10%
of the resident’s net worth.
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¨
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Kansas
— In addition to the suitability requirements described above, it is
recommended that investors should invest no more than 10% of their liquid
net worth in our shares and securities of other real estate investment
trusts. “Liquid net worth” is defined as that portion of net worth (total
assets minus total liabilities) that is comprised of cash, cash
equivalents and readily marketable securities.
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¨
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In
addition to the suitability requirements described above, investors ‘
maximum investment in our shares will be limited to 10% of the investor’s
net worth (exclusive of home, home furnishings and
automobile).
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For
residents of Missouri — In addition to the suitability requirements
described above, no more than ten percent (10%) of any one (1) Missouri
investor’s liquid net worth shall be invested in the securities registered
by us for this offering with the Securities Division.
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¨
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For
residents of Alabama and Mississippi only — In addition to the suitability
standards above, shares will only be sold to Alabama and Mississippi
residents that represent that they have a liquid net worth of at least 10
times the amount of their investment in this real estate investment
program and other similar
programs.
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SUBSTITUTE
FORM W-9
I declare
that the information supplied above is true and correct and may be relied upon
by the Fund in connection with my investment in the Fund. Under
penalties of perjury, by signing this Subscription Agreement, I hereby certify
that (a) I have provided herein my correct Taxpayer Identification Number, (b) I
am not subject to back-up withholding as a result of failure to report all
interest or dividends, or the Internal Revenue Service has notified me that I am
no longer subject to back-up withholding and (c) except as otherwise expressly
indicated above, I am a U.S. person (including a U.S. resident
alien).
The
Internal Revenue Service does not require your consent to any provision of this
document other than the certifications required to avoid backup
withholding.
NOTICE IS
HEREBY GIVEN TO EACH SUBSCRIBER THAT YOU DO NOT WAIVE ANY RIGHTS YOU MAY HAVE
UNDER THE SECURITIES ACT OF 1933, THE SECURITIES EXCHANGE ACT OF 1934 OR ANY
STATE SECURITIES LAW BY EXECUTING THIS AGREEMENT.
Signature
of
Investor Print
Name Date
Signature
of Joint Owner, if
applicable Print
Name Date
6.
BROKER-DEALER AND REGISTERED REPRESENTATIVE (to be completed by selling
registered representative)
The
Broker-Dealer or authorized representative must sign below to complete
order. Broker-Dealer warrants that it is a duly licensed
Broker-Dealer and may lawfully offer Shares in the state designated as the
investor’s address or the state in which the sale was made, if
different. The Broker-Dealer or authorized representative warrants
that he/she has reasonable grounds to believe this investment is suitable for
the subscriber as defined in Section 3(b) of the Rules of Fair Practice of the
FINRA Manual and that he/she has informed subscriber of all aspects of liquidity
and marketability of this investment as required by Section 4 of such Rules of
Fair Practice.
Broker-Dealer
Name: ________________________________ Phone
__________________
Broker-Dealer
Mailing
Address: __________________________________________________
City: _________________________________
State: __________ Zip Code: __________
Registered
Principle, Signature, if
required: ___________________________________________
Registered
Representative
Name: _________________________________________________
Registered
Representative Mailing
Address: ___________________________________________
City: _________________________________
State: __________ Zip Code: __________
Registered
Representative Signature: _________________________________________________
Registered
Representative E-mail address: American Realty Capital Trust, Inc.
may use this e-mail address to provide an e-mail notification receipt of this
subscription and additional information from American Realty Capital Trust,
Inc.
Check
this box to indicate whether submission is made through the Registered
Investment Advisor (RIA) in its capacity as the RIA and not in its capacity as a
Registered Representative of a Broker-Dealer, if applicable, whose agreement
with the subscriber includes a fixed or ‘‘wrap’’ fee feature for advisory and
related brokerage services. If an owner or principal or any member of the RIA
firm is a FINRA licensed Registered Representative affiliated with a
Broker-Dealer, the transaction should be completed through that Broker-Dealer,
not through the RIA.
Please
complete a Subscription Agreement (with all signatures) and check made payable
to American Realty Capital Trust, Inc.
Please
mail a completed Subscription Agreement and check to:
American
Realty Capital Trust, Inc.,
c/o
DST Systems, Inc. 430 W. 7th St, Kansas City, MO 64105-1407
Amount
___________________________ Date
____________________________________
Check/Wire
# ________________________ Account #
________________________________
Registered
Representative # _______________ Firm # _____________ Custodian ID #
____________
Transfer
Agent Reviewer
________________________________________________________
SPECIAL
NOTICE FOR CALIFORNIA RESIDENTS ONLY
CONDITIONS
RESTRICTING TRANSFER OF SHARES
260.141.11
Restrictions on Transfer.
|
The
issuer of any security upon which a restriction on transfer has been
imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 of the Rules
(the “Rules”) adopted under the California Corporate Securities Law (the
“Code”) shall cause a copy of this section to be delivered to each issuee
or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or
transferee.
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It
is unlawful for the holder of any such security to consummate a sale or
transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed
pursuant to Section 260.141.12 of the Rules),
except:
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pursuant
to the order or process of any
court;
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to
any person described in subdivision (i) of Section 25102 of the Code or
Section 260.105.14 of the Rules;
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to
the transferor’s ancestor, descendants or spouse, or any custodian or
trustee for the account of the transferor or the transferor’s ancestors,
descendants or spouse; or to a transferee by a trustee or custodian for
the account of the transferee or the transferee’s ancestors, descendants
or spouse;
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to
holders of securities of the same class of the same
issuer;
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by
way of gift or donation inter vivos or on
death;
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by
or through a broker-dealer licensed under the Code (either acting as such
or as a finder) to a resident of a foreign state, territory or country who
is neither domiciled in this state to the knowledge of the broker-dealer,
nor actually present in this state if the sale of such securities is not
in violation of any securities laws of the foreign state, territory or
country concerned;
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to
a broker-dealer licensed under the Code in a principal transaction, or as
an underwriter or member of an underwriting syndicate or selling
group;
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if
the interest sold or transferred is a pledge or other lien given by the
purchaser to the seller upon a sale of the security for which the
Commissioner’s written consent is obtained or under this rule not
required;
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by
way of a sale qualified under Sections 25111, 25112, 25113 or 15121 of the
Code, of the securities to be transferred, provided that no order under
Section 25140 or subdivision (a) of Section 25143 is in effect with
respect to such qualification;
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by
a corporation to a wholly owned subsidiary of such corporation, or by a
wholly owned subsidiary of a corporation to such
corporation;
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by
way of an exchange qualified under Section 25111, 25112 or 25113 of the
Code provided that no order under Section 25140 or subdivision (a) of
Section 25143 is in effect with respect to such
qualification;
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between
residents of foreign states, territories or countries who are neither
domiciled or actually present in this
state;
|
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to
the State Controller pursuant to the Unclaimed Property Law or to the
administrator of the unclaimed property law of another
state;
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by
the State Controller pursuant to the Unclaimed Property Law or by the
administrator of the unclaimed property law of another state if, in either
such case, such person (a) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (b)
delivers to each purchaser a copy of this rule, and (c) advised the
commissioner of the name of each
purchaser;
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by
a trustee to a successor trustee when such transfer does not involve a
change in the beneficial ownership of the
securities;
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by
way of an offer and sale of outstanding securities in an issuer
transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by
subdivision (1) of Section 25102; provided that any such transfer is on
the condition that any certificate evidencing the security issued to such
transferee shall contain the legend required by this
section.
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The
certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any
transfer thereof, shall bear on their face a legend, prominently stamped
or printed therein in capital letters of not less than 10-point size,
reading as follows:
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IT IS
UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER’S RULES.
SPECIAL
NOTICE FOR MAINE, MASSACHUSETTS, MINNESOTA,
MISSOURI
AND NEBRASKA RESIDENTS ONLY
In no
event may a subscription for Shares be accepted until at least five business
days after the date the subscriber receives the Prospectus. Residents
of the States of Maine, Massachusetts, Minnesota, Missouri and Nebraska who
first received the Prospectus only at the time of subscription may receive a
refund of the subscription amount upon request to the company within five days
of the date of subscription.
INSTRUCTIONS
TO SUBSCRIPTION AGREEMENT SIGNATURE PAGE TO AMERICAN
REALTY
CAPITAL TRUST, INC. SUBSCRIPTION AGREEMENT
INVESTOR
INSTRUCTIONS
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Please
follow these instructions carefully. Failure to do so may result in the
rejection of your subscription. All information on the Subscription
Agreement Signature Page should be completed as
follows:
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1.
INVESTMENT
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Please
mark if this is an initial investment or additional investment. All
additional investments must be in increments of at least $1000. Additional
investments by residents of Maine must be for at least the $1,000 minimum
amount, and residents of Maine must execute a new Subscription Agreement
Signature Page to make additional investments in the company. If
additional investments in the company are made, the investor agrees to
notify the company and the broker-dealer named on the Subscription
Agreement Signature Page in writing if at any time he or she fails to meet
the applicable suitability standards or is unable to make any other
representations or warranties set forth in the Prospectus or the
Subscription Agreement. A minimum investment of $1,000 (100 shares) is
required, except for certain states which require a higher minimum
investment. Certain States may vary. See Prospectus. If the purchase is
eligible for a Net Commission Purchase, please check the appropriate box.
Representative will not receive selling commission. Make A CHECK FOR THE
FULL PURCHASE PRICE OF THE SHARES SUBSCRIBED FOR PAYABLE TO THE ORDER OF
“American Realty Capital Trust, Inc.” Shares may be purchased only by
persons meeting the standards set forth under the “Investor Suitability
Standards” section of the Prospectus. Please indicate the state in which
the sale was made. WE WILL NOT ACCEPT CASH, MONEY ORDERS OR TRAVELERS
CHECKS FOR INITIAL INVESTMENTS.
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2.
TYPE OF OWNERSHIP
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Please
check the appropriate box to indicate the type of entity or type of
individuals subscribing
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3.
REGISTRATION NAMES AND CONTACT INFORMATION
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Please
enter the exact name in which the Shares are to be held. For joint tenants
with right of survivorship or tenants in common, include the names of both
investors. In the case of partnerships or corporations, include the name
of an individual to whom correspondence will be addressed. Trusts should
include the name of the trustee along with the title, signature and
successor trustee pages. All investors must complete the space provided
for taxpayer identification number or social security number. By signing
in Section 5 of the Subscription Agreement Signature Page, the investor is
certifying that this number is correct. Enter the mailing address and
telephone numbers of the registered owner of this investment. In the case
of a Qualified Plan or trust, this will be the address of the trustee.
Indicate the birthdate and occupation of the registered owner unless the
registered owner is a partnership, corporation or
trust.
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4
DISTRIBUTION OPTIONS
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An
investor may choose to have their dividend distribution applied in two
different ways. Dividend distribution(s) must be made in whole percentages
equaling 100%.
a.
CHECK TO ADDRESS OF
RECORD: An investor can elect to receive a percentage (in whole
percentages) of their distribution mailed to their address of record
provided in Section 3.
b.
DISTRIBUTION
ADDRESS: An investor can elect to have a percentage (in whole
percentages) of cash distribution sent to an address other than that
provided in Section 3 (i.e., a bank, brokerage firm or savings and loan,
etc.), please provide the name, account number and
address.
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5
SUBSCRIBER SIGNATURES
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Each
investor must initial each representation in this Section, and then sign
and date this Section. By initialing and signing, each investor is
agreeing that the representations in this Section are true. Except in the
case of fiduciary accounts, the investor may not grant any person a power
of attorney to make such representations on his or her behalf. If title is
to be held jointly, all parties must initial and sign. If the registered
owner is a partnership, corporation or trust, a general partner, officer
or trustee of the entity must initial and sign. PLEASE NOTE THAT THESE
SIGNATURES DO NOT HAVE TO BE NOTARIZED.
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6
BROKER-DEALER
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This
Section is to be completed by the Registered Representative. Please
complete all BROKER-DEALER information contained in Section 6 including
suitability certification. SIGNATURE PAGE MUST BE SIGNED
BY AN AUTHORIZED
REPRESENTATIVE.
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The
Subscription Agreement Signature Page, which has been delivered with the
Prospectus, together with a check for the full purchase price, should be
delivered or mailed to American Realty Capital Trust, Inc., c/o DST Systems,
Inc., 430 W. 7th St.,
Kansas City, MO 64105-1407. Only original, completed copies of
Subscription Agreement Signature Pages can be accepted. Photocopies
or otherwise duplicate Subscription Agreement Signature Pages cannot be accepted
by the company.
IF YOU
NEED FURTHER ASSISTANCE IN COMPLETING THE
SUBSCRIPTION
AGREEMENT SIGNATURE PAGE,
APPENDIX
B: PRIOR PERFORMANCE TABLES
The
tables below provide summarized information concerning other programs sponsored
by American Realty Capital. The information contained herein is
included solely to provide prospective investors with background to be used to
evaluate the real estate experience of our sponsors and their
affiliates. We do not believe that our affiliated programs currently
in existence are in direct competition with our investment
objectives. The private note programs implemented by ARC Income
Properties, LLC, ARC Income Properties II, LLC and ARC Income Properties III,
LLC are net lease programs focused on providing current income through the
payment of cash distributions, while ARC Growth Partnership, LP was formed to
acquire vacant bank branch properties and opportunistically sell such
properties. The investment objectives of these affiliated programs
differ from our investment objectives, which aim to acquire and operate a
portfolio of commercial real estate consisting of freestanding single-tenant
properties net leased to investment grade and other credit worthy tenants
located throughout the United States and the Commonwealth of Puerto
Rico. For additional information see the section entitled “Prior
Performance Summary.”
THE
INFORMATION IN THIS SECTION AND THE TABLES REFERENCED HEREIN SHOULD NOT BE
CONSIDERED AS INDICATIVE OF HOW WE WILL PERFORM. THIS DISCUSSION
REFERS TO THE PERFORMANCE OF PRIOR PROGRAMS AND PROPERTIES SPONSORED BY OUR
SPONSOR OR ITS AFFILIATES OVER THE PERIODS LISTED THEREIN. IN
ADDITION, THE TABLES INCLUDED WITH THIS PROSPECTUS (WHICH REFLECT RESULTS OVER
THE PERIODS SPECIFIED IN EACH TABLE) DO NOT MEAN THAT WE WILL MAKE INVESTMENTS
COMPARABLE TO THOSE REFLECTED IN SUCH TABLES. IF YOU PURCHASE SHARES
IN AMERICAN REALTY TRUST, INC., YOU WILL NOT HAVE ANY OWNERSHIP INTEREST IN ANY
OF THE REAL ESTATE PROGRAMS DESCRIBED IN THE TABLES (UNLESS YOU ARE ALSO AN
INVESTOR IN THOSE REAL ESTATE PROGRAMS).
YOU
SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING INFORMATION AS IMPLYING IN ANY
MANNER THAT WE WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN THE
INFORMATION BELOW BECAUSE THE YIELD AND CASH AVAILABLE AND OTHER FACTORS COULD
BE SUBSTANTIALLY DIFFERENT IN OUR PROPERTIES.
The
following tables are included herein:
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·
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Table
I: Experience in Raising and Investing Funds For Public and
Non-Public Program Properties;
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·
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Table
II: Compensation to Sponsor from Public and Non-Public Program
Properties;
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·
|
Table
III: Operating Results of Public and Non-Public Program
Properties;
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·
|
Table
IV: Results of Completed Public and Non-Public Programs of the
Sponsor and its Affiliates;
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·
|
Table
V: Sales or Disposals of Public and Non-Public Program
Properties; and
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·
|
Table
VI: Acquisitions of Properties by Public and Non-Public
Programs. See Part II.
|
TABLE
I
EXPERIENCE
IN RAISING AND INVESTING FUNDS FOR PUBLIC PROGRAM PROPERTIES
NOT
APPLICABLE
TABLE
I
EXPERIENCE
IN RAISING AND INVESTING FUNDS FOR NON-PUBLIC PROGRAM PROPERTIES
Table I
provides a summary of the experience of the American Realty Capital II, LLC and
its affiliates as a sponsor in raising and investing funds in ARC Income
Properties LLC from its inception on June 5, 2008 to December 31, 2009, ARC
Income Properties II, LLC from its inception on August 12, 2008 to December 31,
2009, ARC Income Properties III, LLC from its inception on September 29, 2009 to
December 31, 2009, and ARC Growth Fund, L.P. from its inception on July 24, 2008
to December 31, 2009. Information is provided as to the manner in which the
proceeds of the offerings have been applied, the timing and length of this
offering and the time period over which the proceeds have been
invested.
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|
ARC
Income
Properties,
LLC
|
|
|
ARC
Income
Properties
II, LLC
|
|
|
ARC
Income
Properties,
III, LLC
|
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|
ARC
Growth
Fund,
LP
|
|
|
|
|
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|
Percentage
of
total
Dollar
Amount
Raised
|
|
|
|
|
|
Percentage
of
total
Dollar
Amount
Raised
|
|
|
|
|
|
Percentage
of
total
Dollar
Amount
Raised
|
|
|
|
|
|
Percentage
of
total
Dollar
Amount
Raised
|
|
|
|
(dollars
in thousands)
|
|
Dollar
amount offered (unsecured debt)
|
|
$ |
19,537 |
|
|
|
|
|
$ |
13,000 |
|
|
|
|
|
$ |
11,243 |
|
|
|
|
|
$ |
7,850 |
|
|
|
|
Dollar
amount raised from investors
|
|
|
19,537 |
|
|
|
|
|
|
13,000 |
|
|
|
|
|
|
11,243 |
|
|
|
|
|
|
5,275 |
|
|
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|
Dollar
amount contributed from sponsor and affiliates
|
|
|
1,975 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
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|
2,575 |
|
|
|
|
Total
dollar amount raised
|
|
$ |
21,512 |
|
|
|
100.00
|
% |
|
$ |
13,000 |
|
|
|
100.00
|
% |
|
$ |
11,243 |
|
|
|
100.00
|
% |
|
$ |
7,850 |
|
|
|
100.00
|
% |
Less
offering expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Selling
commissions and discounts retained by affiliates
|
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$ |
1,196 |
|
|
|
5.56
|
% |
|
$ |
323 |
|
|
|
2.48
|
% |
|
$ |
666 |
|
|
|
5.92
|
% |
|
$ |
— |
|
|
|
0.00
|
% |
Organizational
expenses
|
|
|
— |
|
|
|
0.00
|
% |
|
|
— |
|
|
|
0.00
|
% |
|
|
— |
|
|
|
0.00
|
% |
|
|
— |
|
|
|
0.00
|
% |
Available
for investment
|
|
$ |
20,316 |
|
|
|
94.44
|
% |
|
$ |
12,677 |
|
|
|
97.52
|
% |
|
$ |
10,577 |
|
|
|
94.08
|
% |
|
$ |
7,850 |
|
|
|
100.00
|
% |
Acquisition
costs and loans made secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
investment (cash)
|
|
$ |
11,302 |
|
|
|
52.54
|
% |
|
$ |
9,086 |
|
|
|
69.89
|
% |
|
$ |
10,329 |
|
|
|
91.87
|
% |
|
$ |
41,307 |
|
|
|
526.20
|
% |
Proceeds
from mortgage financings
|
|
|
82,622 |
(1)
|
|
|
384.0
|
% |
|
|
33,399 |
|
|
|
256.9
|
% |
|
|
14,934 |
|
|
|
132.8
|
% |
|
|
19,876 |
|
|
|
253.2
|
% |
Acquisition
expenses
|
|
|
4,734 |
|
|
|
22.01
|
% |
|
|
1,905 |
|
|
|
14.65
|
% |
|
|
20 |
|
|
|
0.1
|
% |
|
|
1,094 |
|
|
|
13.94
|
% |
Acquisition
fees paid to sponsor
|
|
|
2,959 |
|
|
|
13.7
|
% |
|
|
423 |
|
|
|
3.2
|
% |
|
|
662 |
|
|
|
5.8
|
% |
|
|
1,316 |
|
|
|
16.7
|
% |
Total
acquisition costs
|
|
$ |
101,617 |
|
|
|
472.37
|
% |
|
$ |
44,813 |
|
|
|
344.72
|
% |
|
$ |
25,945 |
|
|
|
230.77
|
% |
|
$ |
63,593 |
|
|
|
810.10
|
% |
Cash
used for acquisition costs
|
|
$ |
18,995 |
|
|
|
88.3
|
% |
|
$ |
11,414 |
|
|
|
87.8
|
% |
|
$ |
11,011 |
|
|
|
97.9
|
% |
|
$ |
43,717 |
|
|
|
556.9
|
% |
Percentage
leverage (mortgage financing divided by total acquisition
costs)
|
|
|
81.31
|
% |
|
|
|
|
|
|
74.53
|
% |
|
|
|
|
|
|
57.56
|
% |
|
|
|
|
|
|
31.26
|
% |
|
|
|
|
Date
offering began
|
|
6/09/2008
|
|
|
|
|
|
|
9/17/2008
|
|
|
|
|
|
|
9/29/2009
|
|
|
|
|
|
|
7/24/2008
|
|
|
|
|
|
Number
of offerings in the year
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Length
of offerings (in months)
|
|
|
7 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Months
to invest 90% of amount available for investment
|
|
|
7 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
(1)
|
Includes
mortgage note assumed for ARC Income Properties,
LLC
|
TABLE
II
COMPENSATION
TO SPONSOR FROM PUBLIC PROGRAM PROPERTIES
NOT
APPLICABLE
TABLE
II
COMPENSATION
TO SPONSOR FROM NON-PUBLIC PROGRAM PROPERTIES
Table II
summarizes the amount and type of compensation paid to American Realty Capital
II, LLC and its affiliates for ARC Income Properties LLC from its inception on
June 5, 2008 to December 31, 2009, ARC Income Properties II, LLC from its
inception on August 12, 2008 to December 31, 2009, ARC Income Properties III,
LLC from its inception on September 29, 2009 to December 31, 2009, and ARC
Growth Fund, L.P. from its inception on July 24, 2008 to December 31,
2009.
|
|
ARC
Income
Properties,
LLC
|
|
ARC
Income
Properties
II,
LLC
|
|
ARC
Income
Properties
III,
LLC
|
|
ARC
Growth
Fund,
LP
|
|
|
(dollars
in thousands)
|
Date
offering commenced
|
|
|
6/09/2008
|
|
|
|
9/17/2008
|
|
|
|
9/29/2009
|
|
|
|
7/24/2008
|
|
Dollar
amount raised
|
|
$
|
21,512
(1)
|
|
|
$
|
13,000
(2)
|
|
|
$
|
11,243
(2)
|
|
|
$
|
7,850
(3)
|
|
Amount
paid to sponsor from proceeds of offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
fees
|
|
$
|
785
|
|
|
$
|
323
|
|
|
|
666
|
|
|
|
—
|
|
Acquisition
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate commissions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Advisory
fees – acquisition fees
|
|
$
|
2,959
|
|
|
$
|
423
|
|
|
|
662
|
|
|
|
1,316
|
|
Other – organizational
and offering costs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other – financing
coordination fees
|
|
$
|
939
|
|
|
$
|
333
|
|
|
|
149
|
|
|
|
45
|
|
Dollar
amount of cash generated from operations
before deducting payments to sponsor
|
|
$
|
(1,195
|
)
|
|
$
|
1,731
|
|
|
|
3,537
|
|
|
|
6,163
|
|
Actual
amount paid to sponsor from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
management fees
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Partnership
management fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Reimbursements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Leasing
commissions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
(explain)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
amount paid to sponsor from operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Dollar
amount of property sales and refinancing before deducting payment to
sponsor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,880
|
|
Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,281
|
|
Amount
paid to sponsor from property sale and refinancing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate commissions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Incentive
fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
(disposition fees)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,169
|
|
Other
(refinancing fees)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
(1)
|
Includes
$19.5 million raised from investors and $2.0 million raised from the
sponsor and its affiliates.
|
(2)
|
Amount
raised from investors.
|
(3)
|
Includes
$5.3 million raised from investors and $2.6 million raised from the
sponsor and its affiliates.
|
TABLE
III
OPERATING
RESULTS OF PUBLIC PROGRAM PROPERTIES
NOT
APPLICABLE
TABLE
III
OPERATING
RESULTS OF NON-PUBLIC PROGRAM PROPERTIES
Table III
summarizes the consolidated operating results of ARC Income Property, LLC and
ARC Income Property II, LLC., as of the dates indicated.
|
|
ARC
Income Properties, LLC
|
|
|
ARC
Income Properties II,
LLC
|
|
|
ARC
Income
Properties III,
LLC
|
|
|
ARC
Growth Fund, LP
|
|
|
|
Year
ended
December
31,
2009
|
|
|
Period
from
June
5, 2008
(Date
of
Inception)
to
December
31,
2008
|
|
|
Year
ended
December
31,
2009
|
|
|
Period
from
August
12,
2008
to
December
31,
2008
|
|
|
Period
from
September
29,
2009
to
December
31,
2009
|
|
|
Year
ended
December
31,
2009
|
|
|
Period
from
July
25,
2008
to
December
31,
2008
|
|
|
|
($
in thousands)
|
|
Gross
revenues
|
|
$ |
5,347 |
|
|
$ |
1,341 |
|
|
$ |
3,423 |
|
|
$ |
337 |
|
|
$ |
341 |
|
|
$ |
113 |
|
|
$ |
8 |
|
Profit
(loss) on sales of properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,714
|
) |
|
|
9,746 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
2,847 |
|
|
|
5 |
|
|
|
7 |
|
|
|
— |
|
|
|
33 |
|
|
|
560 |
|
|
|
2,004 |
|
Interest
expense
|
|
|
6,576 |
|
|
|
1,609 |
|
|
|
3,185 |
|
|
|
173 |
|
|
|
387 |
|
|
|
1,323 |
|
|
|
597 |
|
Depreciation
|
|
|
2,676 |
|
|
|
909 |
|
|
|
1,758 |
|
|
|
200 |
|
|
|
127 |
|
|
|
539 |
|
|
|
344 |
|
Amortization
|
|
|
886 |
|
|
|
— |
|
|
|
670 |
|
|
|
— |
|
|
|
42 |
|
|
|
— |
|
|
|
— |
|
Net
income – GAAP Basis
|
|
$ |
(7,638 |
) |
|
$ |
(1,182 |
) |
|
$ |
(2,197 |
) |
|
$ |
(36 |
) |
|
$ |
(248 |
) |
|
$ |
(8,023 |
) |
|
$ |
6,809 |
|
Taxable
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
operations
|
|
$ |
(7,638 |
) |
|
$ |
(1,182 |
) |
|
$ |
(2,197 |
) |
|
$ |
(36 |
) |
|
$ |
(248 |
) |
|
$ |
(2,309 |
) |
|
$ |
(2,937 |
) |
From
gain (loss) on sale
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(5,714 |
) |
|
$ |
9,746 |
|
Cash
generated from (used by) operations(1)
|
|
$ |
(2,349 |
) |
|
$ |
1,154 |
|
|
$ |
(2,282 |
) |
|
$ |
4,013 |
|
|
$ |
3,537 |
|
|
$ |
(1,769 |
) |
|
$ |
(3,226 |
) |
Cash
generated from sales
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(447
|
) |
|
|
11,158 |
|
Cash
generated from refinancing
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cash
generated from operations, sales and refinancing(1)
|
|
|
(2,349
|
) |
|
|
1,154 |
|
|
|
(2,282
|
) |
|
|
4,013 |
|
|
|
3,537 |
|
|
|
(2,216
|
) |
|
|
7,932 |
|
Less:
Cash interest payments made to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
operating cash flow
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
From
sales and refinancing
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
From
other
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Cash
generated after cash distributions
|
|
$ |
(2,349 |
) |
|
$ |
1,154 |
|
|
$ |
(2,282 |
) |
|
$ |
4,013 |
|
|
$ |
3,537 |
|
|
$ |
(2,216 |
) |
|
$ |
7,932 |
|
Less:
Special items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
generated after cash distributions and special items
|
|
$ |
(2,349 |
) |
|
$ |
1,154 |
|
|
$ |
(2,282 |
) |
|
$ |
4,013 |
|
|
$ |
3,537 |
|
|
$ |
(2,216 |
) |
|
$ |
7,932 |
|
|
(1)
|
Includes
interest expense for payments to
investors
|
Note — non-public
programs are combined with other entities for federal income tax reporting
purposes Therefore federal income tax results for these programs is not
presented.
TABLE
IV
RESULTS
OF COMPLETED PUBLIC PROGRAMS OF THE SPONSOR AND
ITS
AFFILIATES
NOT
APPLICABLE
TABLE
IV
RESULTS
OF COMPLETED NON-PUBLIC PROGRAMS OF THE SPONSOR AND
ITS
AFFILIATES
NOT
APPLICABLE
TABLE
V
SALES
OR DISPOSALS OF PUBLIC PROGRAM PROPERTIES
NOT
APPLICABLE
TABLE
V
SALES
OR DISPOSALS OF NON-PUBLIC PROGRAM PROPERTIES
Table V
provides summary information on the results of sales or disposals of properties
by non-public prior programs having similar investment objectives to ours. All
figures below are through December 31, 2009.
ARC
Growth Partnership, LP
|
|
|
|
|
|
Selling
Price Net of Closing Costs and GAAP Adjustments
|
|
Costs
of Properties Including
Closing
Costs and Soft Costs
|
|
|
|
|
Property
|
|
Date
Acquired
|
|
Date
of Sale
|
|
Cash
Received
(cash
deficit)
Net
of
Closing
Costs
|
|
Mortgage
Balance
at
Time
of
Sale
|
|
Purchase
Money
Mortgage
Taken
Back
by
Program(2)
|
|
Adjustments
Resulting
From
Application
of
GAAP(3)
|
|
Total(4)
|
|
Original
Mortgage
Financing
|
|
Total
Acquisition
Costs,
Capital
Improvement
Costs,
Closing
and Soft
Costs(5)
|
|
Total
|
|
Excess
(Deficit)
of Property
Operating
Cash
Receipts
Over Cash
Expenditures(6)
|
Bayonet
Point, FL
|
|
July-08
|
|
July-08
|
|
$
|
628
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
628
|
|
|
$
|
—
|
|
|
$
|
642
|
|
|
$
|
642
|
|
|
$
|
—
|
|
Boca
Raton, FL
|
|
July-08
|
|
July-08
|
|
|
2,434
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,434
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
—
|
|
Bonita
Springs, FL
|
|
July-08
|
|
May-09
|
|
|
(459
|
)
|
|
|
1,207
|
|
|
|
—
|
|
|
|
—
|
|
|
|
748
|
|
|
|
1,207
|
|
|
|
543
|
|
|
|
1,750
|
|
|
|
(29
|
)
|
Clearwater,
FL
|
|
July-08
|
|
September-08
|
|
|
253
|
|
|
|
539
|
|
|
|
—
|
|
|
|
—
|
|
|
|
792
|
|
|
|
539
|
|
|
|
371
|
|
|
|
910
|
|
|
|
(3
|
)
|
Clearwater,
FL
|
|
July-08
|
|
October-08
|
|
|
(223
|
)
|
|
|
582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
359
|
|
|
|
582
|
|
|
|
400
|
|
|
|
982
|
|
|
|
(3
|
)
|
Destin,
FL
|
|
July-08
|
|
July-08
|
|
|
1,358
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,358
|
|
|
|
—
|
|
|
|
1,183
|
|
|
|
1,183
|
|
|
|
—
|
|
Englewood,
FL
|
|
July-08
|
|
November-08
|
|
|
138
|
|
|
|
929
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,067
|
|
|
|
929
|
|
|
|
632
|
|
|
|
1,561
|
|
|
|
(13
|
)
|
Fort
Myers, FL
|
|
July-08
|
|
July-08
|
|
|
2,434
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,434
|
|
|
|
—
|
|
|
|
1,566
|
|
|
|
1,566
|
|
|
|
—
|
|
Naples,
FL
|
|
July-08
|
|
July-08
|
|
|
2,727
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,727
|
|
|
|
—
|
|
|
|
1,566
|
|
|
|
1,566
|
|
|
|
—
|
|
Palm
Coast, FL
|
|
July-08
|
|
September-08
|
|
|
891
|
|
|
|
1,770
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,661
|
|
|
|
1,770
|
|
|
|
-530
|
|
|
|
1,240
|
|
|
|
(8
|
)
|
Pompano
Beach, FL
|
|
July-08
|
|
October-08
|
|
|
1,206
|
|
|
|
2,162
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,368
|
|
|
|
2,162
|
|
|
|
-411
|
|
|
|
1,751
|
|
|
|
(8
|
)
|
Port
St. Lucie, FL
|
|
July-08
|
|
August-09
|
|
|
(60
|
)
|
|
|
654
|
|
|
|
—
|
|
|
|
—
|
|
|
|
594
|
|
|
|
654
|
|
|
|
648
|
|
|
|
1,302
|
|
|
|
(40
|
)
|
Punta
Gorda, FL
|
|
July-08
|
|
July-08
|
|
|
2,337
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,337
|
|
|
|
—
|
|
|
|
2,143
|
|
|
|
2,143
|
|
|
|
—
|
|
Vero
Beach, FL
|
|
July-08
|
|
February-09
|
|
|
87
|
|
|
|
830
|
|
|
|
—
|
|
|
|
—
|
|
|
|
917
|
|
|
|
830
|
|
|
|
565
|
|
|
|
1,395
|
|
|
|
(13
|
)
|
Cherry
Hill, NJ
|
|
July-08
|
|
July-08
|
|
|
1,946
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,946
|
|
|
|
—
|
|
|
|
2,225
|
|
|
|
2,225
|
|
|
|
—
|
|
Cranford,
NJ
|
|
July-08
|
|
July-08
|
|
|
1,453
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,453
|
|
|
|
—
|
|
|
|
725
|
|
|
|
725
|
|
|
|
—
|
|
Warren,
NJ
|
|
July-08
|
|
July-08
|
|
|
1,375
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,375
|
|
|
|
—
|
|
|
|
1,556
|
|
|
|
1,556
|
|
|
|
—
|
|
Westfield,
NJ
|
|
July-08
|
|
July-08
|
|
|
2,539
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,539
|
|
|
|
—
|
|
|
|
2,230
|
|
|
|
2,230
|
|
|
|
—
|
|
Lehigh
Acres, FL
|
|
July-08
|
|
August-09
|
|
|
(207
|
)
|
|
|
758
|
|
|
|
—
|
|
|
|
—
|
|
|
|
551
|
|
|
|
758
|
|
|
|
752
|
|
|
|
1,510
|
|
|
|
(28
|
)
|
Alpharetta,
GA
|
|
July-08
|
|
December-08
|
|
|
98
|
|
|
|
914
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,012
|
|
|
|
914
|
|
|
|
617
|
|
|
|
1,531
|
|
|
|
(9
|
)
|
Atlanta,
GA
|
|
July-08
|
|
September-08
|
|
|
825
|
|
|
|
1,282
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,107
|
|
|
|
1,282
|
|
|
|
862
|
|
|
|
2,144
|
|
|
|
(27
|
)
|
Columbus,
GA
|
|
July-08
|
|
December-08
|
|
|
(43
|
)
|
|
|
111
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68
|
|
|
|
111
|
|
|
|
85
|
|
|
|
196
|
|
|
|
(3
|
)
|
Duluth,
GA
|
|
July-08
|
|
July-08
|
|
|
1,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,851
|
|
|
|
—
|
|
|
|
1,457
|
|
|
|
1,457
|
|
|
|
—
|
|
Oakwood,
GA
|
|
July-08
|
|
September-08
|
|
|
49
|
|
|
|
898
|
|
|
|
—
|
|
|
|
—
|
|
|
|
947
|
|
|
|
898
|
|
|
|
607
|
|
|
|
1,505
|
|
|
|
(1
|
)
|
Riverdale,
GA
|
|
July-08
|
|
August-09
|
|
|
(104
|
)
|
|
|
471
|
|
|
|
—
|
|
|
|
—
|
|
|
|
367
|
|
|
|
471
|
|
|
|
286
|
|
|
|
757
|
|
|
|
(12
|
)
|
Laurinburg,
NC
|
|
July-08
|
|
July-08
|
|
|
188
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
188
|
|
|
|
—
|
|
|
|
197
|
|
|
|
197
|
|
|
|
—
|
|
Haworth,
NJ
|
|
July-08
|
|
July-08
|
|
|
1,781
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,781
|
|
|
|
—
|
|
|
|
1,834
|
|
|
|
1,834
|
|
|
|
—
|
|
Fredericksburg,
VA
|
|
August-08
|
|
August-08
|
|
|
2,432
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,432
|
|
|
|
—
|
|
|
|
2,568
|
|
|
|
2,568
|
|
|
|
—
|
|
Dallas,
PA
|
|
August-08
|
|
August-08
|
|
|
1,539
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,539
|
|
|
|
—
|
|
|
|
366
|
|
|
|
366
|
|
|
|
—
|
|
Virginia
Beach, VA
|
|
August-08
|
|
August-08
|
|
|
1,210
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,210
|
|
|
|
—
|
|
|
|
930
|
|
|
|
930
|
|
|
|
—
|
|
Baytown,
TX
|
|
August-08
|
|
August-08
|
|
|
3,205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,205
|
|
|
|
—
|
|
|
|
1,355
|
|
|
|
1,355
|
|
|
|
—
|
|
Bradenton,
FL
|
|
November-08
|
|
November-08
|
|
|
778
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
778
|
|
|
|
—
|
|
|
|
748
|
|
|
|
748
|
|
|
|
—
|
|
Sarasota,
FL
|
|
November-08
|
|
November-08
|
|
|
1,688
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,688
|
|
|
|
—
|
|
|
|
867
|
|
|
|
867
|
|
|
|
—
|
|
Tuscaloosa,
AL
|
|
November-08
|
|
November-08
|
|
|
580
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
580
|
|
|
|
—
|
|
|
|
242
|
|
|
|
242
|
|
|
|
—
|
|
Palm
Harbor, FL
|
|
November-08
|
|
November-08
|
|
|
1,064
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,064
|
|
|
|
—
|
|
|
|
790
|
|
|
|
790
|
|
|
|
—
|
|
Reading,
PA
|
|
November-08
|
|
November-08
|
|
|
137
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
137
|
|
|
|
—
|
|
|
|
248
|
|
|
|
248
|
|
|
|
—
|
|
St.
Augustine, FL
|
|
November-08
|
|
November-08
|
|
|
1,936
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,936
|
|
|
|
—
|
|
|
|
1,428
|
|
|
|
1,428
|
|
|
|
—
|
|
Cumming,
GA
|
|
December-08
|
|
December-08
|
|
|
1,227
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,227
|
|
|
|
—
|
|
|
|
810
|
|
|
|
810
|
|
|
|
—
|
|
Suffolk,
VA
|
|
December-08
|
|
February-09
|
|
|
115
|
|
|
|
172
|
|
|
|
—
|
|
|
|
—
|
|
|
|
287
|
|
|
|
172
|
|
|
|
129
|
|
|
|
301
|
|
|
|
(1
|
)
|
Titusville,
FL
|
|
December-08
|
|
December-08
|
|
|
321
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
321
|
|
|
|
—
|
|
|
|
260
|
|
|
|
260
|
|
|
|
—
|
|
West Caldwell,
NJ(1)
|
|
December-08
|
|
September-09
|
|
|
333
|
|
|
|
898
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,231
|
|
|
|
357
|
|
|
|
358
|
|
|
|
715
|
|
|
|
15
|
|
Palm
Coast, FL
|
|
December-08
|
|
December-08
|
|
|
507
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
507
|
|
|
|
—
|
|
|
|
599
|
|
|
|
599
|
|
|
|
—
|
|
Mableton,
GA
|
|
December-08
|
|
December-08
|
|
|
676
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
676
|
|
|
|
—
|
|
|
|
696
|
|
|
|
696
|
|
|
|
—
|
|
Warner
Robins, GA
|
|
January-09
|
|
January-09
|
|
|
149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
149
|
|
|
|
—
|
|
|
|
257
|
|
|
|
257
|
|
|
|
—
|
|
Philadelphia, PA(1)
|
|
January-09
|
|
October-09
|
|
|
291
|
|
|
|
1,474
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,765
|
|
|
|
552
|
|
|
|
1,105
|
|
|
|
1,657
|
|
|
|
3
|
|
Stockholm,
NJ
|
|
December-08
|
|
November-09
|
|
|
(29
|
)
|
|
|
240
|
|
|
|
—
|
|
|
|
—
|
|
|
|
211
|
|
|
|
240
|
|
|
|
438
|
|
|
|
678
|
|
|
|
(46
|
)
|
Sebastian,
FL
|
|
July-08
|
|
December-09
|
|
|
(104
|
)
|
|
|
654
|
|
|
|
—
|
|
|
|
—
|
|
|
|
550
|
|
|
|
654
|
|
|
|
1,302
|
|
|
|
1,956
|
|
|
|
(102
|
)
|
Fort
Myers, FL
|
|
July-08
|
|
December-09
|
|
|
(314
|
)
|
|
|
795
|
|
|
|
—
|
|
|
|
—
|
|
|
|
481
|
|
|
|
795
|
|
|
|
1,582
|
|
|
|
2,377
|
|
|
|
(113
|
)
|
|
|
|
|
|
|
$
|
43,243
|
|
|
$
|
17,340
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,583
|
|
|
$
|
15,877
|
|
|
$
|
41,829
|
|
|
$
|
57,706
|
|
|
$
|
(441
|
)
|
(1)
|
Sale
of property was to a related party.
|
(2)
|
No
purchase money mortgages were taken back by any
program.
|
(3)
|
Financial
information for programs is prepared in accordance with GAAP, therefore,
GAAP adjustments are not
applicable.
|
(4)
|
All
taxable gains were categorized as capital gains. None of these sales were
reported on the installment basis.
|
(5)
|
Amounts
shown do not include a pro rata share of the offering costs. There were no
carried interests received in lieu of commissions in connection with the
acquisition of property.
|
(6)
|
Amounts
exclude the amounts included under “Selling Price Net of Closing Costs and
GAAP Adjustments” or “Costs of Properties Including Closing Costs and Soft
Costs” and exclude costs incurred in administration of the program not
related to the operation of the
property.
|
AMERICAN
REALTY CAPITAL TRUST, INC.
Common
Stock
32,500,000 SHARES
– MAXIMUM FOLLOW-ON OFFERING
PROSPECTUS
August
5, 2010
You should rely only on the information
contained in this prospectus. No dealer, salesperson or other
person is authorized to make any representations other than those
contained in the prospectus and supplemental literature authorized by
American Realty Capital Trust, Inc. and referred to in this prospectus,
and, if given or made, such information and representations must not be
relied upon. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or any sale of these
securities. You should not assume that the delivery of this
prospectus or that any sale made pursuant to this prospectus implies that
the information contained in this prospectus will remain fully accurate
and correct as of any time subsequent to the date of this
prospectus.
|
PART
II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item
31. Other Expenses of Issuance and Distribution.
Securities
and Exchange Commission Registration Fee
|
|
$ |
25,672 |
|
FINRA
Filing Fee
|
|
|
35,500 |
|
Printing
and Mailing Expenses
|
|
|
5,000,000 |
|
Blue
Sky Fees and Expenses
|
|
|
32,725 |
|
Legal
Fees and Expenses
|
|
|
2,250,000 |
|
Accounting
Fees and Expenses
|
|
|
300,000 |
|
Transfer
Agent and Escrow Fees
|
|
|
200,000 |
|
Educational
Conferences and Seminars
|
|
|
3,000,000 |
|
Advertising
and Sales Literature
|
|
|
3,750,000 |
|
Due
Diligence Expenses
|
|
|
1,250,000 |
|
Miscellaneous
|
|
|
6,221,159 |
|
Total
|
|
|
22,065,056 |
|
Item
32. Sales to Special Parties.
None.
Item
33. Recent Sales of Unregistered Securities.
In August
2007, American Realty Capital II, LLC purchased from us 20,000 Shares for $10.00
per Share, for an aggregate purchase price of $200,000, in connection with our
organization. We made a capital contribution to American Realty
Capital Operating Partnership, L.P., our operating partnership, in the amount of
$200,000 in exchange for 20,000 partnership units of the operating
partnership. Our advisor also made a capital contribution to American
Realty Capital Operating Partnership, L.P., our operating partnership, in the
amount of $2,000 in exchange for 200 limited partnership units of the operating
partnership. The 200 partnership units received by our advisor may be
exchanged, at its option, for 200 shares identical to those being offered
pursuant to the Prospectus included in this Registration Statement, subject to
our option to pay cash in lieu of such shares. No sales commission or
other consideration was paid in connection with such sales, which were
consummated without registration under the Securities Act of 1933, as amended,
in reliance upon the exemption from registration in Section 4(2) of the Act as
transactions not involving any public offering. The purchase price
for the Rockland Properties (see “Real Estate Investment”) includes a preferred
equity investment of approximately $4.0 million from an unaffiliated entity
pursuant to a limited liability agreement entered into by this unaffiliated
entity and our operating partnership, American Realty Capital Operating
Partnership, L.P. to obtain an indirect ownership interest in the Rockland
Properties. This preferred equity investment was repaid in cash in
the year ended December 31, 2009.
Item
34. Indemnification of Directors and Officers.
Article
XII, Sections 12.2 and 12.3 of the company’s charter provide as
follows:
SECTION
12.2. LIMITATION OF DIRECTOR AND OFFICER LIABILITY;
INDEMNIFICATION.
Subject
to the conditions set forth under Maryland law or in paragraph (c) or (d) below,
no Director or officer of the company shall be liable to the company or its
Stockholders for money damages. Neither the amendment nor repeal of
this Section 12.2(a), nor the adoption or amendment of any other provision of
the Charter or Bylaws inconsistent with this Section 12.2(a), shall apply to or
affect in any respect the applicability of the preceding sentence with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption.
Subject
to the conditions set forth under Maryland law or in paragraph (c) or (d) below,
the company shall indemnify and, without requiring a preliminary determination
of the ultimate entitlement to indemnification, pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (i) any individual
who is a present or former Director or officer of the company and who is made or
threatened to be made a party to the proceeding by reason of his or her service
in that capacity, (ii) any individual who, while a Director or officer of
the company and at the request of the company, serves or has served as a
director, officer, partner or trustee of such corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise and who is made or threatened to be made a party to the
proceeding by reason of his or her service in that capacity or (iii) the Advisor
of any of its Affiliates acting as an agent of the company. The company
may, with the approval of the Board of Directors or any duly authorized
committee thereof, provide such indemnification and advance for expenses to a
person who served a predecessor of the company in any of the capacities
described in (i) or (ii) above and to any employee or agent of the company or a
predecessor of the company. The Board may take such action as is necessary
to carry out this Section 12.2(b). No amendment of the Charter or repeal
of any of its provisions shall limit or eliminate the right of indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
Notwithstanding
anything to the contrary contained in paragraph (a) or (b) above, the company
shall not provide for indemnification of a Director, the Advisor or any
Affiliate of the Advisor (the “Indemnitee”) for any liability
or loss suffered by any of them and the company shall not provide that an
Indemnitee be held harmless for any loss or liability suffered by the company,
unless all of the following conditions are met:
(i)
The Indemnitee has determined, in good faith that the
course of conduct that caused the loss or liability was in the best interests of
the company.
(ii) The
Indemnitee was acting on behalf of or performing services for the
company.
(iii)
Such liability or loss was not the result of (A) negligence or misconduct, in
the case that the Indemnitee is a Director (other than an Independent Director),
the Advisor or an Affiliate of the Advisor or (B) gross negligence or willful
misconduct, in the case that the Indemnitee is an Independent
Director.
(iv) Such
indemnification or agreement to hold harmless is recoverable only out of Net
Assets and not from the Stockholders.
Notwithstanding
anything to the contrary contained in paragraph (a) or (b) above, the company
shall not provide indemnification for any loss, liability or expense arising
from or out of an alleged violation of federal or state securities laws by such
party unless one or more of the following conditions are met: (i)
there has been a successful adjudication on the merits of each count involving
alleged material securities law violations as to the Indemnitee; (ii) such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the Indemnitee; or (iii) a court of competent jurisdiction
approves a settlement of the claims against the Indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which Securities were offered or
sold as to indemnification for violations of securities laws.
SECTION 12.3. PAYMENT OF
EXPENSES. Subject to the provisions of Section 12.2(c) of this Article
XII, the company shall pay or reimburse reasonable legal expenses and other
costs incurred by an Indemnitee in advance of final disposition of a proceeding
if: (i) the proceeding relates to acts or omissions with respect to
the performance of duties or services on behalf of the company, (ii) the
Indemnitee provides company with a written affirmation of the Indemnitee’s good
faith belief that the Indemnitee has met the standard of conduct necessary for
indemnification by the company as authorized by Section 12.2, (iii) the
proceeding was initiated by a third party who is not a Stockholder or, if by a
Stockholder acting in his or her capacity as such, a court of competent
jurisdiction approves such advancement and (iv) the Indemnitee provides the
company with a written undertaking to repay the amount paid or reimbursed by the
company, together with the applicable legal rate of interest if it is ultimately
determined that the Indemnitee did not comply with the requisite standard of
conduct.
Item
35. Treatment of Proceeds from Stock Being Registered.
NOT
APPLICABLE
Item
36. Financial Statements and Exhibits.
(a) FINANCIAL
STATEMENTS
The
following financial statements are included or have been incorporated by
reference as part of the prospectus included in this registration
statement:
As of
December 31, 2009 and 2008 and the years ended December 31, 2009 and 2008 and
the period from August 17, 2007 (date of inception) through December 31,
2007
|
(1)
|
Report
of Independent Registered Public Accounting
Firm
|
|
(2)
|
Consolidated
Balance Sheets as of December 31, 2009 and
2008
|
|
(3)
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009, 2008 and
the period from August 17, 2007 (date of inception) to December 31,
2007
|
|
(4)
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
the period from August 17, 2007 (date of inception) to December 31,
2007
|
|
(5)
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2009,
2008 and the period from August 17, 2007 (date of inception) to December
31, 2007
|
|
(6)
|
Notes
to Consolidated Financial
Statements
|
|
(7)
|
Schedule
of Properties and Accumulated
Depreciation
|
As of
March 31, 2010 and 2009 and the three months then ended
|
(1)
|
Consolidated
Balance Sheets as of March 31, 2010 and
2009
|
|
(2)
|
Consolidated
Statements of Operations for the three months ended March 31, 2010 and
2009
|
|
(3)
|
Consolidated
Statements of Cash Flows for the three months ended March 31, 2010 and
2009
|
|
(4)
|
Consolidated
Statements of Shareholders’ Equity for the three months ended March 31,
2010
|
|
(5)
|
Notes
to Consolidated Financial
Statements
|
(b) EXHIBITS
The
following documents are filed as part of this Registration
Statement:
|
|
|
1.1(2)
|
|
Form
of Dealer Manager Agreement by and between American Realty Capital Trust,
Inc. and Realty Capital Securities, LLC
|
1.2(2)
|
|
Form
of Soliciting Dealers Agreement by and between Realty Capital Securities,
LLC and the Soliciting Dealers
|
3.1(3)
|
|
Amended
and Restated Charter of American Realty Capital Trust,
Inc.
|
3.1(a)(5)
|
|
Articles
of Amendment of American Realty Capital Trust, Inc.
|
3.2(1)
|
|
Bylaws
of American Realty Capital Trust, Inc.
|
4.1(3)
|
|
Agreement
of Limited Partnership of American Realty Capital Operating Partnership,
L.P.
|
4.1(a)(7)
|
|
First
Amendment to Agreement of Limited Partnership of American Realty Capital
Operating Partnership, L.P.
|
4.2
|
|
Specimen
Certificate for the Shares is not applicable because our board of
directors has authorized the issuance of Shares of our stock without
certificates
|
5**
|
|
Opinion
of Proskauer Rose LLP as to the legality of the Shares being
registered
|
5.1**
|
|
Opinion
of Venable LLP
|
8**
|
|
Opinion
of Proskauer Rose LLP as to tax matters
|
10.1(8)
|
|
Amended
and Restated Escrow Agreement by and among American Realty Capital Trust,
Inc., Boston Private Bank & Trust Company and Realty Capital
Securities, LLC
|
10.2(2)
|
|
Form
of Advisory Agreement by and among American Realty Capital Trust, Inc.,
American Realty Capital Operating Partnership, L.P. and American Realty
Capital Advisors, LLC
|
10.3(1)
|
|
Form
of Management Agreement, by and among American Realty Capital Trust, Inc.,
American Realty Capital Operating Partnership, L.P. and American Realty
Capital Properties, LLC
|
10.3(a)(7)
|
|
First
Amendment to Management Agreement
|
10.3(b)(7)
|
|
Second
Amendment to Management Agreement
|
10.3(c)(10)
|
|
Third
Amendment to Management Agreement
|
10.3(d)(10)
|
|
Fourth
Amendment to Management Agreement
|
10.3(e)(10)
|
|
Fifth
Amendment to Management Agreement
|
10.3(f)(13)
|
|
Sixth
Amendment to Management Agreement
|
10.3(g)(13)
|
|
Seventh
Amendment to Management Agreement
|
10.3(h)(13)
|
|
Eighth
Amendment to Management Agreement
|
10.3.(i)(13)
|
|
Ninth
Amendment to Management Agreement
|
10.3(j)(13)
|
|
Tenth
Amendment to Management Agreement
|
10.4(7)
|
|
Company’s
Stock Option Plan
|
10.5(6)
|
|
Agreement
of Assignment of Partnership Interests between American Realty Capital
Operating Partnership, L.P. and American Realty Capital LLC, William M.
Kahane, Nicholas S. Schorsch, Lou Davis and Peter and Maria Wirth dated
March 5, 2008. — Federal Express Distribution Center
|
10.6(6)
|
|
Agreement
of Assignment of Partnership Interests between American Realty Capital
Operating Partnership, L.P. and Nicholas S. Schorsch dated March 12, 2008.
— Harleysville National Bank Portfolio
|
10.7(8)
|
|
Limited
Liability Company Agreement of American Realty Capital Equity Bridge, LLC
dated August 20, 2008
|
10.8(a)(10)
|
|
Agreement
for Transfer of Membership Interest between ARC Growth Fund I, LLC, and
American Realty Capital Operating Partnership, L.P., dated September 16,
2008. (Transfer to the Operating Partnership of an indirect interest in
National City portfolio. Amends exhibit previously filed as exhibit 10.8
to the Post-Effective Amendment No. 2 to Form S-11, dated September 3,
2008.)
|
|
|
|
10.8(b)(10)
|
|
Agreement
for Transfer of Membership Interests between ARC Growth Fund I, LLC, and
American Realty Capital Operating Partnership, L.P., dated September 16,
2008. (Transfer to the Operating Partnership of an indirect
interest in National City portfolio. Amends exhibit previously
filed as exhibit 10.8 to the Post-Effective Amendment No. 2 to Form S-11,
dated September 3, 2008.)
|
10.9(a)(10)
|
|
Agreement
of Assignment of Membership Interests by and among Milestone Partners
Limited, and American Realty Capital Holdings, LLC, and American Realty
Capital Operating Partnership, L.P., dated September 29,
2008. (Transfer to the Operating Partnership of an indirect
interest in the Rite Aid portfolio).
|
10.9(b)(10)
|
|
Consent
to Transfer Agreement among ARC RACADOH001, LLC, ARC RACAROH001, LLC, ARC
RAELPOH001, LLC, ARC RALISOH001, LLC, ARC RACARPA001, LP, ARC RAPITPA001,
LP, American Realty Capital Holdings, LLC, Milestone Partners Limited,
American Realty Capital Operating Partnership, L.P., and Wells Fargo Bank,
N.A., dates September 29, 2008. (Transfer of mortgage to
Operating Partnership in the Rite Aid portfolio).
|
10.10(14)
|
|
Employee
and Director Restricted Share Plan
|
10.11(15)
|
|
Amended
and Restated Advisory Agreement among American Realty Capital Trust, Inc.,
American Realty Capital Operating Partnership, L.P. and American Realty
Capital Advisors, LLC, dated as of June 2, 2010
|
23.1**
|
|
Consent
of Grant Thornton LLP
|
23.2**
|
|
Consent
of Proskauer Rose LLP (included in Opinion of Proskauer Rose LLP in
Exhibit 5)
|
23.3**
|
|
Consent
of Venable LLP (included in Opinion of Venable LLP in Exhibit
5.1)
|
24(4)
|
|
Power
of Attorney
|
** Will
be filed in an amendment to this Registration Statement.
(1)
|
Previously
filed as an exhibit to Amendment No. 1 to the Registration Statement on
Form S-11 that we filed with the Securities and Exchange Commission on
November 20, 2007.
|
(2)
|
Previously
filed as an exhibit to Amendment No. 3 to the Registration Statement on
Form S-11 that we filed with the Securities and Exchange Commission on
January 16, 2008.
|
(3)
|
Previously
filed as an exhibit to Amendment No. 4 to the Registration Statement on
Form S-11 that we filed with the Securities and Exchange Commission on
January 22, 2008.
|
(4)
|
Previously
filed as an exhibit to Amendment No. 5 to the Registration Statement on
Form S-11 that we filed with the Securities and Exchange Commission on
January 24, 2008.
|
(5)
|
Previously
filed as an exhibit to Current Report on Form 8-K that we filed with the
Securities and Exchange Commission on March 4,
2008.
|
(6)
|
Previously
filed as an exhibit to Quarterly Report on Form 10-Q that we filed with
the Securities and Exchange Commission on May 14,
2008.
|
(7)
|
Previously
filed as an exhibit to Pre-Effective Amendment No. 1 to Post Effective
Amendment No. 1 to Form S-11 that we filed with the Securities and
Exchange Commission on June 3,
2008.
|
(8)
|
Previously
filed as an exhibit to Pre-Effective Amendment No. 1 to Post Effective
Amendment No. 2 to Form S-11 that we filed with the Securities and
Exchange Commission on September 3,
2008.
|
(9)
|
Previously
filed as an exhibit to the Form 10-Q that we filed with Securities and
Exchange Commission on November 13,
2008.
|
(10)
|
Previously
filed as an exhibit to the Pre-Effective Amendment No. 2 to the
Post-Effective Amendment No. 3 to Form S-11 that we filed with the
Securities and Exchange Commission on February 18,
2009.
|
(11)
|
Previously
filed as an exhibit to Pre-Effective Amendment No. 1 to Post Effective
Amendment No. 5 to Form S-11 that we filed with the Securities and
Exchange Commission on August 28,
2009.
|
(12)
|
Previously
filed as an exhibit to Pre-effective Amendment No. 1 to Post-Effective
Amendment No. 6 to Form S-11 that that we filed with the Securities and
Exchange Commission on November 2,
2009.
|
(13)
|
Previously
filed as an exhibit to the Annual Report on Form 10-K that we filed with
the Securities and Exchange Commission on March 18,
2010.
|
(14)
|
Previously
filed as an exhibit to Pre-effective Amendment No. 1 to Post-Effective
Amendment No. 8 to Form S-11 that we filed with the Securities and
Exchange Commission on March 18,
2010.
|
(15)
|
Previously
filed as an exhibit to Current Report on Form 8-K that we filed with the
Securities and Exchange Commission on June 3,
2010.
|
Item
37. Undertakings.
A. The
undersigned Registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) That
all post-effective amendments will comply with the applicable forms, rules and
regulations of the Commission at the time such post-effective amendments are
filed.
(4) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
B. The
Registrant undertakes to send to each Stockholder at least on an annual basis a
detailed statement of any transactions with the Advisor or its Affiliates, and
of fees, commissions, compensation and other benefits paid or accrued to the
Advisor or its Affiliates for the fiscal year completed, showing the amount paid
or accrued to each recipient and the services performed.
C. The
Registrant undertakes to provide to the Stockholders the financial statements
required by Form 10-K for the first full fiscal year of operations of the
Registrant.
D. The
Registrant hereby undertakes to send to the Stockholders, within 60 days after
the close of each quarterly fiscal period, the information specified by Form
10-Q, if such report is required to be filed with the Securities and Exchange
Commission.
E. The
Registrant undertakes to file a sticker supplement pursuant to Rule 424(c) under
the Act during the distribution period describing each Property not identified
in the Prospectus at such time as there arises a reasonable probability that
such Property will be acquired and to consolidate all such stickers into a
post-effective amendment filed at least once every three months, with the
information contained in such amendment provided simultaneously to the existing
Stockholders. Each sticker supplement should also disclose all
compensation and fees received by the Advisor and its Affiliates in connection
with any such acquisition. The post-effective amendment shall include
audited financial statements meeting the requirements Rule 3-14 of Regulation
S-X only for Properties acquired during the distribution period.
F. The
Registrant also undertakes to file, after the end of the distribution period, a
current report on Form 8-K containing the financial statements and additional
information required by Rule 3-14 of Regulation S-X, to reflect each commitment
(i.e., the signing of a binding purchase agreement) made after the end of the
distribution period involving the use of 10% or more (on a cumulative basis) of
the net proceeds of the offering and to provide the information contained in
such report to the Stockholders at least once each quarter after the
distribution period of the offering has ended.
G. The
Registrant undertakes that, for the purposes of determining liability under the
Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b)
under the Securities Act as part a registration statement relating to an
offering, other than registration statements relying on Rule 430B under the
Securities Act or other than prospectuses filed in reliance on Rule 430A under
the Securities Act, shall be deemed to be part of and included in the
Registration Statement as of the date it is first used after effectiveness;
provided, however, that no statement made in a registration statement or
prospectus that is part of the Registration Statement or made in a document
incorporated or deemed incorporated by reference into the Registration Statement
or prospectus that is part of the Registration Statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the Registration Statement or prospectus that was
part of the Registration Statement or made in any such document immediately
prior to such date of first use.
H. For
the purpose of determining liability of the Registrant under the Securities Act
to any purchaser in the initial distribution of the securities, the undersigned
Registrant undertakes that in a primary offering of securities of the
undersigned Registrant pursuant to this Registration Statement, regardless of
the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned Registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser: (i) any preliminary prospectus or prospectus of the
undersigned Registrant relating to the offering required to be filed pursuant to
Rule 424 under the Securities Act; (ii) any free writing prospectus relating to
the offering prepared by or on behalf of the undersigned Registrant or used or
referred to by the undersigned Registrant; (iii) the portion of any other free
writing prospectus relating to the offering containing material information
about the undersigned Registrant or its securities provided by or on behalf of
the undersigned Registrant; and (iv) any other communication that is an offer in
the offering made by the undersigned Registrant to the purchaser.
I.
Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers and controlling persons of
the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
TABLE
VI
ACQUISITIONS
OF PROPERTIES BY PUBLIC PROGRAMS
The table
below presents information concerning the acquisition of properties from
non-public programs from their inception to December 31, 2009, sponsored by
American Realty Capital II, LLC and its predecessor entities and
affiliates.
Name
|
|
Location
|
|
Type of
Property
|
|
Number
of Units
|
|
|
Total
Gross
Leasable
Space
(Sq. ft.)
|
|
Date of
Purchase
|
|
Mortgage
Financing
at Date of
Purchase
|
|
|
Cash
Down
Payment
|
|
|
Contract
Purchase
Price Plus
Acquisition
Fee
|
|
|
Other Cash
Expenditures
Expensed
|
|
|
Other Cash
Expenditures
Capitalized
|
|
|
Total
Acquisition
Cost
|
|
(dollars
in thousands)
|
|
ARC
Income Properties, LLC – Citizens Bank
|
|
Various
|
|
Bank
Branches
|
|
|
62 |
|
|
|
303,130 |
|
July
2008 to August 2009
|
|
$ |
82,622 |
|
|
$ |
18,995 |
|
|
$ |
96,883 |
|
|
$ |
2,802 |
|
|
|
1,932 |
|
|
$ |
101,617 |
|
ARC
Income Properties II, LLC – PNC Bank
|
|
New
Jersey, Ohio, Pennsylvania
|
|
Bank
Branches
|
|
|
50 |
|
|
|
275,436 |
|
November
2008
|
|
|
33,399 |
|
|
|
11,414 |
|
|
|
42,709 |
|
|
|
— |
|
|
|
2,104 |
|
|
|
44,813 |
|
ARC
Income Properties III, LLC – Home Depot
|
|
South
Carolina
|
|
Distribution
facility
|
|
|
1 |
|
|
|
465,600 |
|
Nov-09
|
|
|
14,934 |
|
|
|
11,011 |
|
|
|
25,925 |
|
|
|
20 |
|
|
|
20 |
|
|
|
25,945 |
|
ARC
Growth Fund, LP – Wachovia Bank
|
|
Various
|
|
Bank
Branches
|
|
|
52 |
|
|
|
229,544 |
|
July
to December 2008
|
|
|
19,876 |
|
|
|
43,717 |
|
|
|
61,124 |
|
|
|
— |
|
|
|
2,469 |
|
|
|
63,593 |
|
|
|
|
|
|
|
|
165 |
|
|
|
1,273,710 |
|
|
|
$ |
150,831 |
|
|
$ |
85,137 |
|
|
$ |
226,641 |
|
|
$ |
2,822 |
|
|
$ |
6,525 |
|
|
$ |
235,968 |
|
(1)
|
ARC
Growth Partnership, LP mutually terminated the contractual agreement with
Wachovia Bank, N.A. in March 2009, and has not acquired any vacant bank
branches following this termination. ARC Growth Partnership, LP is
currently in the process of selling its remaining
assets.
|
TABLE
VI
ACQUISITIONS
OF PROPERTIES BY NON-PUBLIC PROGRAMS
The table
below presents information concerning the acquisition of properties from
non-public programs from their inception to December 31, 2009, sponsored by
American Realty Capital II, LLC and its predecessor entities and
affiliates.
|
|
|
|
|
|
|
|
|
Total
Gross
Leasable
Space
(Sq.
ft.)
|
|
|
|
Mortgage
Financing
at
Date of
Purchase
|
|
|
|
|
|
Contract
Purchase
Price
Plus
Acquisition
Fee
|
|
|
Other
Cash
Expenditures
Expensed
|
|
|
Other
Cash
Expenditures
Capitalized
|
|
|
|
|
(dollars
in thousands)
|
|
ARC
Income Properties, LLC –Citizen Bank
|
|
Various
|
|
Bank
Branches
|
|
|
65 |
|
|
|
303,130 |
|
July
to August 2009
|
|
$ |
82,622 |
|
|
$ |
18,995 |
|
|
$ |
96,883 |
|
|
$ |
2,802 |
|
|
|
1,932 |
|
|
$ |
101,617 |
|
ARC
Income Properties II, LLC–PNC Bank
|
|
New
Jersey,
Ohio,
Pennsylvania
|
|
Bank
Branches
|
|
|
50 |
|
|
|
275,436 |
|
November
2008
|
|
|
33,399 |
|
|
|
11,414 |
|
|
|
42,709 |
|
|
|
— |
|
|
|
2,104 |
|
|
|
44,813 |
|
ARC
Income Properties III, LLC–Home Depot
|
|
South
Carolina
|
|
Distribution
facility
|
|
|
1 |
|
|
|
465,600 |
|
Nov-09
|
|
|
14,934 |
|
|
|
11,011 |
|
|
|
25,925 |
|
|
|
20 |
|
|
|
20 |
|
|
|
25,945 |
|
ARC
Growth Fund, LP – Wachovia Bank
|
|
Various
|
|
Bank
Branches
|
|
|
52 |
|
|
|
229,544 |
|
July
to
December
2008
|
|
|
19,876 |
|
|
|
43,717 |
|
|
|
61,124 |
|
|
|
— |
|
|
|
2,469 |
|
|
|
63,593 |
|
|
|
|
|
|
|
|
168 |
|
|
|
1,273,710 |
|
|
|
$ |
150,831 |
|
|
$ |
85,137 |
|
|
$ |
226,641 |
|
|
$ |
2,822 |
|
|
$ |
6,525 |
|
|
$ |
235,968 |
|
(1)
|
ARC
Growth Partnership, LP mutually terminated the contractual agreement with
Wachovia Bank, N.A. in March 2009, and has not acquired any vacant bank
branches following this termination. ARC Growth Partnership, LP
is currently in the process of selling its remaining
assets.
|
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused Post-Effective
Amendment No. to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Jenkintown, State of Pennsylvania, on
the 5th day of August, 2010.
|
AMERICAN
REALTY CAPITAL TRUST, INC.
|
|
|
|
|
|
By:
|
/s/
NICHOLAS S. SCHORSCH
|
|
|
|
NICHOLAS
S. SCHORSCH
|
|
|
|
CHIEF
EXECUTIVE OFFICER AND
|
|
|
|
CHAIRMAN
OF THE BOARD OF DIRECTORS
|
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
|
/s/ Nicholas S. Schorsch
|
|
Chief
Executive Officer & Chairman of the Board of
|
|
August
5,
2010
|
Nicholas
S. Schorsch
|
|
Directors
|
|
|
|
|
|
|
|
/s/ William M. Kahane
|
|
Chief
Operating Officer, President and Director
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August
5,
2010
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William
M. Kahane
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/s/ Brian S. Block
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Principal
Financial Officer, Principal Accounting
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August
5,
2010
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Brian
S. Block
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Officer
& Executive Vice President
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/s/ Leslie Michelson
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Independent
Director
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August
5,
2010
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Leslie
Michelson
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/s/ William G. Stanley
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Independent
Director
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August 5,
2010
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William
G. Stanley
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Independent
Director
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August 5,
2010
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Robert
H. Burns
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